Guidance on Passive Foreign Investment Companies and Controlled Foreign Corporations Held by Domestic Partnerships and S Corporations and Related Person Insurance Income, 3890-3919 [2022-00067]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 87, Number 16 (Tuesday, January 25, 2022)]
[Proposed Rules]
[Pages 3890-3919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-00067]



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Vol. 87

Tuesday,

No. 16

January 25, 2022

Part II





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





Guidance on Passive Foreign Investment Companies and Controlled Foreign 
Corporations Held by Domestic Partnerships and S Corporations and 
Related Person Insurance Income; Proposed Rule

Federal Register / Vol. 87 , No. 16 / Tuesday, January 25, 2022 / 
Proposed Rules

[[Page 3890]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118250-20]
RIN 1545-BP94


Guidance on Passive Foreign Investment Companies and Controlled 
Foreign Corporations Held by Domestic Partnerships and S Corporations 
and Related Person Insurance Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and partial withdrawal of notice 
of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding the 
treatment of domestic partnerships and S corporations that own stock of 
passive foreign investment companies (``PFICs'') and their domestic 
partners and shareholders (the ``proposed regulations''). The proposed 
regulations also provide guidance regarding the determination of the 
controlling domestic shareholders of foreign corporations, the owner of 
a controlled foreign corporation (``CFC'') or qualified electing fund 
(``QEF'') that makes an election under section 1411, the treatment of S 
corporations with accumulated earnings and profits under subpart F of 
part III of subchapter N of chapter 1 of the Internal Revenue Code 
(``subpart F'' of the ``Code''), and the determination and inclusion of 
related person insurance income (``RPII'') under section 953(c). The 
proposed regulations affect United States persons that own, directly or 
indirectly, stock in certain foreign corporations.

DATES: Written or electronic comments and requests for a public hearing 
must be received by April 25, 2022. Requests for a public hearing must 
be submitted as prescribed in the ``Comments and Requests for a Public 
Hearing'' section.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically. Submit electronic submissions via the Federal 
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-118250-
20) by following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The IRS expects to have limited personnel available to 
process public comments that are submitted on paper through mail. Until 
further notice, any comments submitted on paper will be considered to 
the extent practicable. The Department of the Treasury (``Treasury 
Department'') and the IRS will publish for public availability any 
comment submitted electronically, and to the extent practicable on 
paper, to its public docket. Send hard copy submissions to: 
CC:PA:LPD:PR (REG-118250-20), Room 5203, Internal Revenue Service, P.O. 
Box 7604, Ben Franklin Station, Washington, DC 20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations 
under Sec. Sec.  1.958-1(d), 1.964-1, 1.1291-1, 1.1291-9, 1.1293-1, 
1.1295-1, 1.1296-1, 1.1297-0, 1.1297-3, 1.1298-1, 1.1298-3, and 1.1411-
10, Edward Tracy at (202) 317-6934; concerning proposed regulation 
Sec.  1.958-1(e), Jennifer N. Keeney at (202) 317-5045; concerning 
proposed regulation Sec.  1.953-3, Raphael Cohen at (202) 317-3756 or 
Josephine Firehock at (202) 317-6938; concerning submissions of 
comments or requests for a public hearing, Regina Johnson at (202) 317-
5177 (not toll free numbers).

SUPPLEMENTARY INFORMATION:

Background

I. Regulations Addressing the Treatment of Domestic Partnerships for 
Purposes of Sections 951(a) and 951A

    On October 10, 2018, the Treasury Department and the IRS published 
in the Federal Register proposed regulations under section 951A (REG-
104390-18, 83 FR 51072) (``2018 proposed regulations''). The 2018 
proposed regulations provided a hybrid approach to the treatment of a 
domestic partnership that is a United States shareholder, as defined in 
section 951(b) (``U.S. shareholder''), with respect to a CFC (``U.S. 
shareholder partnership''). Under the hybrid approach, a U.S. 
shareholder partnership would determine its section 951A inclusion, and 
the partners of the partnership that were not also U.S. shareholders of 
the CFC (``non-U.S. shareholder partners'') would take into account 
their distributive share of the inclusion. See proposed Sec.  1.951A-
5(b), 83 FR 51072, 51101. Partners that were themselves U.S. 
shareholders of a CFC (``U.S. shareholder partners'') would not take 
into account their distributive share of the partnership's global 
intangible low-taxed income (``GILTI'') inclusion amount and instead 
would be treated as proportionately owning the stock of the CFC within 
the meaning of section 958(a) as if the domestic partnership were a 
foreign partnership. See proposed Sec.  1.951A-5(c), 83 FR 51072, 
51101-51102.
    On June 21, 2019, the Treasury Department and the IRS published 
final regulations (TD 9866) in the Federal Register (84 FR 29288, as 
corrected at 84 FR 44223, 84 FR 44693, and 84 FR 53052) under sections 
951, 951A, 1502, and 6038 that include guidance with respect to the 
treatment of domestic partnerships that own stock in CFCs for purposes 
of section 951A (the ``final section 951A regulations''). The final 
section 951A regulations did not adopt the hybrid approach set forth in 
the 2018 proposed regulations and instead generally treat a domestic 
partnership as an aggregate of all of its partners for purposes of 
computing income inclusions under section 951A (and other provisions 
that apply by reference to section 951A). The final section 951A 
regulations apply to taxable years of foreign corporations beginning 
after December 31, 2017, and to taxable years of U.S. shareholders in 
which or with which such taxable years of foreign corporations end. 
Sec.  1.951A-7. On the same date, the Treasury Department and the IRS 
published proposed regulations (REG-101828-19) in the Federal Register 
(84 FR 29114) that extended this aggregate treatment of domestic 
partnerships for purposes of computing subpart F inclusions under 
section 951 (the ``2019 proposed regulations'').
    In the preamble to the 2019 proposed regulations, the Treasury 
Department and the IRS requested comments on the application of 
sections 1291 and 1293 through 1298 of the Code (the ``PFIC regime'') 
to domestic partnerships that directly or indirectly own PFIC stock and 
their domestic partners, including the operation of the PFIC regime 
with respect to non-U.S. shareholder partners of domestic partnerships 
under section 1297(d). 84 FR 29120. The 2019 proposed regulations are 
issued, with modifications, as final regulations in the Rules and 
Regulations section of this issue of the Federal Register (the ``final 
regulations'').
    On August 22, 2019, the Treasury Department and the IRS released 
Notice 2019-46, 2019-37 I.R.B. 695, announcing the intention to issue 
regulations that will permit a domestic partnership or S corporation to 
apply the hybrid approach set forth in proposed Sec.  1.951A-5 for 
taxable years ending before June 22, 2019 (that is, the hybrid approach 
set forth in the 2018 proposed regulations, which was revised in the 
2019 final section 951A regulations to reflect an aggregate approach 
for purposes of section 951A). The notice also addressed the 
applicability of penalties in the case of a domestic partnership or S 
corporation that consistently applied proposed

[[Page 3891]]

Sec.  1.951A-5 on or before June 21, 2019, but filed a tax return 
consistent with the final section 951A regulations under Sec.  1.951A-
1(e). The notice was issued to address the compliance burden, and 
related penalty exposure, of domestic partnerships and S corporations 
that filed returns based on the hybrid approach set forth in the 2018 
proposed regulations for taxable years ending before June 22, 2019, but 
later became subject to the aggregate approach of Sec.  1.951A-1(e) for 
those years.

II. Treatment of Domestic Partnerships as Entities or Aggregates of 
their Partners--In General

    For purposes of applying a particular provision of the Code, a 
partnership may be treated as either an entity separate from its 
partners or as an aggregate of its partners. Under the aggregate 
approach, the partners of a partnership, and not the partnership, are 
treated as owning the partnership's assets and conducting the 
partnership's operations. Under the entity approach, the partnership is 
respected as separate and distinct from its partners, and therefore the 
partnership, and not the partners, is treated as owning the 
partnership's assets and conducting the partnership's operations. 
Whether the aggregate or entity approach applies depends on which 
approach is more appropriate to carry out the scope and purpose of a 
particular Code provision. See H.R. Rep. No. 83-2543, at 59 (1954) 
(Conf. Rep.) (``Both the House provisions and the Senate amendment 
provide for the use of the `entity' approach in the treatment of 
transactions between a partner and a partnership . . . . No inference 
is intended, however, that a partnership is to be considered as a 
separate entity for the purpose of applying other provisions of the 
internal revenue laws if the concept of the partnership as a collection 
of individuals is more appropriate for such provisions.''); see also 
Holiday Village Shopping Center v. United States, 5 Cl. Ct. 566, 570 
(1984), aff'd 773 F.2d 276 (Fed. Cir. 1985) (``[T]he proper inquiry is 
not whether a partnership is an entity or an aggregate for purposes of 
applying the internal revenue laws generally, but rather which is the 
more appropriate and more consistent with Congressional intent with 
respect to the operation of the particular provision of the Internal 
Revenue Code at issue.''); Casel v. Commissioner, 79 T.C. 424, 433 
(1982) (``When the 1954 Code was adopted by Congress, the conference 
report . . . clearly stated that whether an aggregate or entity theory 
of partnerships should be applied to a particular Code section depends 
upon which theory is more appropriate to such section.''); Sec.  1.701-
2(e)(1) (``The Commissioner can treat a partnership as an aggregate of 
its partners in whole or in part as appropriate to carry out the 
purpose of any provision of the Internal Revenue Code or the 
regulations promulgated thereunder.'').
    Consistent with this authority under subchapter K, the Treasury 
Department and the IRS have previously adopted the aggregate approach 
to partnerships to carry out the purpose of various provisions, 
including international provisions, of the Code. In addition to 
applying the aggregate approach for purposes of determining section 951 
and section 951A inclusions in the final section 951A regulations and 
the final regulations, regulations under section 871 apply the 
aggregate approach in applying the 10 percent shareholder test of 
section 871(h)(3) to determine whether interest paid to a partnership 
would be considered portfolio interest under section 871(h)(2). Sec.  
1.871-14(g)(3)(i). The aggregate approach was also adopted in 
regulations issued under section 367(a) to address the transfer of 
property by a domestic or foreign partnership to a foreign corporation 
in an exchange described in section 367(a)(1). See Sec.  1.367(a)-
1T(c)(3)(i)(A). Similarly, the Treasury Department and the IRS adopted 
the aggregate approach for purposes of applying the regulations under 
section 367(b). See Sec.  1.367(b)-2(k); see also Sec. Sec.  1.367(e)-
1(b)(2) (treating stock and securities of a distributing corporation 
owned by or for a partnership (domestic or foreign) as owned 
proportionately by its partners) and 1.861-9(e)(2) (requiring certain 
corporate partners to apportion interest expense, including the 
partner's distributive share of partnership interest expense, by 
reference to the partner's assets).

III. PFIC Rules

A. Section 1291

    Under section 1291, a United States person (``U.S. person'') may be 
subject to ordinary income treatment and an interest charge when it 
receives an ``excess distribution'' from a PFIC or recognizes gain on 
the sale or disposition of PFIC stock (the ``excess distribution 
rules''). These charges are determined based on the person's holding 
period and the years in which the foreign corporation qualified as a 
PFIC. The excess distribution rules do not apply, however, if a 
shareholder makes certain elections with respect to the PFIC for its 
entire holding period of the PFIC stock.
    The Treasury regulations under section 1291 apply the excess 
distribution rules to ``shareholders'' of a PFIC. See Sec.  1.1291-
1(b)(2)(v). Under Sec.  1.1291-1(b)(7), a ``shareholder'' of a PFIC 
generally is defined as a U.S. person that owns PFIC stock directly or 
indirectly through certain corporations or pass-through entities (an 
``indirect shareholder''), within the meaning of section 1298(a) and 
Sec.  1.1291-1(b)(8) (collectively, a ``PFIC shareholder''). For 
purposes of sections 1291 and 1298, neither a domestic partnership nor 
an S corporation is treated as a PFIC shareholder except for purposes 
of any information reporting requirements (including the requirement to 
file an annual report under section 1298(f)) or where otherwise 
explicitly provided in regulations. Section 1.1291-1(b)(8)(iii)(A) and 
(B) provides that if a domestic partnership or S corporation owns PFIC 
stock, the partners or S corporation shareholders, respectively, are 
considered to own the PFIC stock proportionately in accordance with 
their ownership interests. As a result, if a domestic partnership or S 
corporation owns PFIC stock, the excess distribution rules apply at the 
partner or S corporation shareholder level.

B. Qualified Electing Funds

    A PFIC shareholder may elect to treat the PFIC as a QEF (a ``QEF 
election'') under the rules in sections 1293 through 1295 (the ``QEF 
rules''). Under the QEF rules, provided the PFIC complies with certain 
information reporting requirements, the PFIC shareholder includes its 
pro rata share of the ordinary earnings and net capital gain generated 
by the QEF on a current basis under section 1293(a) (``QEF 
inclusions''), and any gain on a future disposition of the QEF shares 
may be treated as capital gain not subject to the excess distribution 
rules. Unlike for the excess distribution rules, under Sec.  1.1295-
1(j) domestic partnerships and S corporations are treated as PFIC 
shareholders for purposes of the QEF rules. A PFIC shareholder making a 
valid QEF election effective as of the beginning of its holding period 
in the PFIC stock is not subject to the excess distribution rules with 
respect to that PFIC (a ``pedigreed QEF''). Conversely, a PFIC 
shareholder that makes a QEF election effective after the beginning of 
its holding period in the PFIC stock is simultaneously subject to the 
excess distribution rules and the QEF rules with respect to that PFIC 
(an ``unpedigreed QEF'').
    A domestic partnership or S corporation that owns PFIC stock 
generally makes the QEF election with

[[Page 3892]]

respect to the PFIC under Sec.  1.1295-1(d)(2)(i)(A) and (d)(2)(ii). 
Section 1.1293-1(c)(1) provides that the domestic partnership or S 
corporation recognizes any QEF inclusions at the entity level, and each 
U.S. person that is an interest holder in the domestic partnership or S 
corporation takes into account its pro rata share of the inclusions.

C. Mark-to-Market PFICs

    Under section 1296 (the ``mark-to-market (MTM) rules''), if stock 
in a PFIC is marketable stock (``section 1296 stock''), a U.S. person 
owning that stock can make a mark-to-market election with respect to 
the PFIC (an ``MTM election''). For this purpose, pursuant to section 
1296(g)(1), U.S. persons may be deemed to own certain marketable stock 
held by foreign partnerships, trusts, or estates. Section 1296(a) 
provides that if a U.S. person makes an MTM election with respect to a 
PFIC, the U.S. person is treated as if it sold the section 1296 stock 
at the end of each year, with any gain being recognized as ordinary 
income (``MTM gain'') and any loss potentially resulting in a deduction 
(``MTM loss,'' and together with MTM gains, ``MTM amounts'').
    If a domestic partnership or an S corporation owns, or is treated 
as owning under Sec.  1.1296-1(e) (providing ownership rules for PFIC 
stock owned through certain foreign entities), section 1296 stock, the 
domestic partnership or S corporation can make an MTM election with 
respect to the PFIC because the election is made by the U.S. person 
owning or treated as owning the stock. See Sec.  1.1296-1(h)(1)(i). The 
domestic partnership or S corporation, by virtue of being a U.S. 
person, includes or deducts any MTM amounts at the entity level. See 
Sec.  1.1296-1(c)(1) and (3).

D. CFC/PFIC Overlap

    Section 957(a) defines a CFC as any foreign corporation in which 
U.S. shareholders own (within the meaning of section 958(a)), or are 
considered as owning by applying the ownership rules of section 958(b), 
more than 50 percent of the total combined voting power or value of the 
stock of the corporation on any day during the taxable year of the 
corporation. Under section 951(b), a U.S. shareholder is a U.S. person 
that owns (within the meaning of section 958(a)), or is considered as 
owning by applying the ownership rules of section 958(b), at least 10 
percent of the total combined voting power of all classes of stock 
entitled to vote or at least 10 percent of the total value of all 
classes of stock of a foreign corporation. Section 957(c) defines a 
U.S. person by reference to section 7701(a)(30), which defines the term 
as a citizen or resident of the United States, a domestic partnership, 
a domestic corporation, and certain domestic estates and trusts.
    Under section 1297(d), a foreign corporation that is both a CFC and 
a PFIC (a ``CFC/PFIC'') is not considered to be a PFIC with respect to 
a shareholder during the shareholder's qualified portion (as defined in 
section 1297(d)(2)) of its holding period (the ``CFC overlap rule''). 
The term ``qualified portion'' generally means the portion of the 
shareholder's holding period during which the shareholder is a U.S. 
shareholder with respect to the PFIC and during which the PFIC is also 
a CFC. Generally, this means that the PFIC regime should not apply to a 
U.S. person that is subject to the subpart F rules. The legislative 
history to the CFC overlap rule indicates that it was enacted due to 
concern about the simultaneous application of the subpart F and PFIC 
regimes to the same shareholders, explaining that ``a shareholder that 
is subject to current inclusion under the subpart F rules with respect 
to stock of a PFIC that is also a CFC generally is not subject also to 
the PFIC provisions with respect to the same stock.'' H.R. Rep. 105-
148, at 534 (1997).

E. PFIC Purging Elections

1. Section 1291(d)(2) Purging Elections
    Under section 1291(d)(2), a PFIC shareholder that owns, or is 
treated as owning, shares in an unpedigreed QEF may make certain 
elections to ``purge'' the PFIC taint and thereby no longer be subject 
simultaneously to the excess distribution and QEF rules with respect to 
that PFIC. Under section 1291(d)(2)(A) and Sec.  1.1291-10, a PFIC 
shareholder may elect to recognize any gain on a deemed disposition of 
its PFIC stock with the gain being subject to the excess distribution 
rules. Alternatively, under section 1291(d)(2)(B) and Sec.  1.1291-9, 
if the unpedigreed QEF is also a CFC (that is, it is a CFC/PFIC), the 
PFIC shareholder may elect to include its share of the CFC/PFIC's post-
1986 accumulated earnings and profits (``E&P'') as a dividend subject 
to the excess distribution rules (together with the election described 
in the preceding sentence, the ``section 1291 purging elections''). The 
section 1291 purging elections are made by a PFIC ``shareholder'' as 
defined in Sec.  1.1291-9(j)(3), which is a U.S. person that is a 
shareholder or indirect shareholder, as defined in Sec.  1.1291-1(b)(7) 
or (8), respectively. If the PFIC shareholder makes one of the section 
1291 purging elections, the QEF is a pedigreed QEF with respect to the 
shareholder.
2. Section 1298(b)(1) Purging Elections
    Pursuant to section 1298(b)(1) and Sec.  1.1298-3, a PFIC 
shareholder may make certain purging elections with respect to a 
foreign corporation that qualifies as a ``former PFIC'' or a ``section 
1297(e) PFIC.'' These purging elections result in the foreign 
corporation no longer being treated as a PFIC as to the shareholder.
    Under Sec.  1.1291-9(j)(2)(iv), a ``former PFIC'' is a foreign 
corporation that satisfies neither the income test nor the asset test 
under section 1297(a), but its stock held by the PFIC shareholder is 
treated as stock of a PFIC as a result of section 1298(b)(1) (that is, 
the corporation was a PFIC that was not a QEF at some time during the 
PFIC shareholder's holding period). Pursuant to Sec.  1.1291-
9(j)(2)(v), a foreign corporation is a ``section 1297(e) PFIC'' \1\ if 
it (i) qualifies as a PFIC under section 1297(a) on the first day on 
which the ``qualified portion'' (as defined in section 1297(d)(2)) of 
the PFIC shareholder's holding period in the foreign corporation begins 
(as determined under section 1297(e)(2)); and (ii) the stock of the 
foreign corporation held by the PFIC shareholder is treated as stock of 
a PFIC pursuant to section 1298(b)(1) because at any time during the 
PFIC shareholder's holding period of the stock, other than the 
qualified portion, the corporation was a PFIC that was not a QEF.
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    \1\ Although the PFIC regulations use the term ``section 
1297(e)'' PFIC, the term refers to CFC/PFICs under current section 
1297(d). The regulations were issued before section 1297(e) was 
redesignated as section 1297(d) by the Tax Technical Corrections Act 
of 2007, Public Law 110-172, sec. 11(a)(24)(A), Dec. 29, 2007, 121 
Stat 2473.
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    Similar to the section 1291 purging elections, under Sec. Sec.  
1.1297-3 and 1.1298-3, a PFIC shareholder can make either a deemed sale 
election or deemed dividend purging election with respect to either a 
former PFIC or section 1297(e) PFIC (the ``section 1298 purging 
elections'' and, together with the section 1291 purging elections, the 
``PFIC purging elections''). The rules applicable to the section 1298 
purging elections in Sec. Sec.  1.1297-3(a) and 1.1298-3(a) are 
substantially the same as those applicable to the section 1291 purging 
elections, including that each section 1298 purging election is made by 
a PFIC ``shareholder'' as defined in Sec.  1.1291-9(j)(3).

[[Page 3893]]

F. PFIC Information Reporting Requirements Under Section 1298(f)

    Under section 1298(f), each U.S. person that is a PFIC shareholder 
as defined in Sec.  1.1291-1(b)(7) must file an annual report with 
respect to the PFIC containing the information required by the IRS. 
Generally, pursuant to Sec.  1.1298-1(b)(1), a U.S. person that is a 
PFIC shareholder must file Form 8621, ``Information Return by a 
Shareholder of a Passive Foreign Investment Company or Qualified 
Electing Fund,'' if, during the shareholder's taxable year, it is (i) a 
direct PFIC shareholder; (ii) an indirect PFIC shareholder that holds 
any interest in the PFIC through one or more foreign entities; or (iii) 
an indirect PFIC shareholder that is treated as the owner of any 
portion of a domestic grantor trust that owns stock of a PFIC directly 
or through one or more foreign entities.
    Certain other indirect PFIC shareholders are also required to file 
Form 8621. Specifically, under Sec.  1.1298-1(b)(2)(i), an indirect 
PFIC shareholder that owns stock of a PFIC through one or more U.S. 
persons must file Form 8621 with respect to the PFIC if, during the 
indirect shareholder's taxable year, it is (i) treated as receiving an 
excess distribution with respect to the PFIC; (ii) treated as 
recognizing gain that is treated as an excess distribution as a result 
of a disposition of the PFIC; (iii) required to recognize QEF 
inclusions under section 1293(a); (iv) required to include or deduct 
MTM amounts under section 1296(a); or (v) required to report the status 
of an election under section 1294 with respect to the PFIC. However, 
under Sec.  1.1298-1(b)(2)(ii), an indirect PFIC shareholder that is 
required to either recognize QEF inclusions under section 1293(a) or 
MTM amounts under section 1296(a) is generally not required to file 
Form 8621 if another PFIC shareholder through which the indirect PFIC 
shareholder owns its interest in the PFIC timely files Form 8621. Thus, 
if an indirect PFIC shareholder is treated as owning an interest in a 
PFIC by reason of an interest in a domestic partnership or S 
corporation and the domestic partnership or S corporation recognizes 
QEF inclusions or MTM amounts and timely files Form 8621, the indirect 
PFIC shareholder is generally not required to file Form 8621. Pursuant 
to Sec.  1.1298-1(b)(2)(ii), this exception does not apply to a PFIC 
shareholder that transfers stock in a PFIC subject to a QEF election to 
a domestic partnership or S corporation if the domestic partnership or 
S corporation does not make a QEF election with respect to the PFIC 
after the transfer, in which case the transferor-PFIC shareholder is 
still required to file Form 8621.

G. Section 1298 Attribution of Ownership Provisions

    For purposes of the entire PFIC regime, section 1298(a) contains 
various attribution rules that generally apply to treat stock of a PFIC 
as owned by a U.S. person. However, pursuant to section 1298(a)(1)(B), 
except as provided in regulations, section 1298(a) does not apply to 
treat stock owned (or treated as owned) by a U.S. person as owned by 
any other person. Under section 1298(a)(3), stock owned directly or 
indirectly by a partnership, estate, or trust is considered as being 
owned proportionately by its partners or beneficiaries.

IV. Subpart F Rules

A. Controlling Domestic Shareholders

    The controlling domestic shareholders of a foreign corporation take 
certain actions with respect to the foreign corporation, such as 
electing the method of calculating its E&P under section 964(a). See 
Sec.  1.964-1(c)(3). Under Sec.  1.964-1(c)(5)(i), the controlling 
domestic shareholders of a CFC are defined as the United States 
shareholders, within the meaning of section 951(b) or section 953(c), 
that, in the aggregate, own (within the meaning of section 958(a)) more 
than 50 percent of the total combined voting power of all classes of 
stock of the CFC entitled to vote and that undertake to act on the 
CFC's behalf. If the more than 50 percent ownership requirement is not 
satisfied, the controlling domestic shareholders of the CFC are all of 
the U.S. shareholders that own (within the meaning of section 958(a)) 
stock of the CFC. Under Sec.  1.964-1(c)(5)(ii), with respect to a 
noncontrolled section 902 corporation (as defined in section 
904(d)(2)(E)), the controlling domestic shareholders are the majority 
domestic corporate shareholders, which are those domestic corporations 
that meet certain ownership requirements under section 902(a) (as it 
existed before its repeal in 2017) and that own, directly or 
indirectly, more than 50 percent of the combined voting power of the 
stock of the noncontrolled section 902 corporation owned, directly or 
indirectly, by all domestic corporations. Under Sec.  1.964-
1(c)(3)(iii), a controlling domestic shareholder that takes actions 
with respect to a foreign corporation under Sec.  1.964-1(c)(3) must 
provide notice of those actions to certain other domestic shareholders 
of the foreign corporation.
    With respect to a U.S. shareholder partnership, the 2019 proposed 
regulations provided that aggregate treatment does not apply for 
purposes of determining whether any U.S. shareholder is a controlling 
domestic shareholder. Proposed Sec.  1.958-1(d)(2). In response to a 
request for comments on this rule in the preamble to the 2019 proposed 
regulations, one comment was received. That comment recommended, on 
balance, that aggregate treatment should not apply for purposes of 
determining whether a U.S. shareholder is a controlling domestic 
shareholder for purposes of section 964.
    The final regulations do not extend aggregate treatment for 
purposes of determining controlling domestic shareholders of foreign 
corporations and, thus, adopt the exception included in the 2019 
proposed regulations. Sec.  1.958-1(d)(2)(v).

B. Treatment of S Corporation Distributions Under Section 1368 and 
Treatment of S Corporations and S Corporation Shareholders Under 
Section 1373 and Subpart F

1. S Corporation Distributions
    Section 1368(b) and (c) provides for the treatment of distributions 
made by an S corporation (as defined in section 1361(a)(1)) with 
respect to its stock to which section 301(c) would apply but for 
section 1368(a). Section 1368(b) addresses the treatment of those 
distributions by an S corporation that does not have accumulated E&P 
(``AE&P''). Section 1368(b)(1) provides that a distribution by an S 
corporation is not included in the gross income of an S corporation 
shareholder to the extent that the amount of the distribution does not 
exceed the shareholder's adjusted basis in its S corporation stock. 
Section 1368(b)(2) provides that, if the amount of the distribution 
exceeds the shareholder's adjusted basis in its S corporation stock, 
that excess is treated as gain from the sale or exchange of property.
    Section 1368(c) addresses the treatment of distributions by an S 
corporation that has AE&P (for example, if the S corporation generated 
E&P in years before its election to be treated as an S corporation) and 
therefore has an accumulated adjustments account (``AAA''), as defined 
by section 1368(e)(1). AE&P does not include amounts that would 
increase an S corporation's AAA. See section 1371(c). Accordingly, an S 
corporation's AAA functions similarly to the stock basis adjustment 
rules of section 1367 and is increased to account for income taxed to 
its shareholders. See section

[[Page 3894]]

1368(e)(1)(A). AAA is limited to income generated by the corporation 
during its status as an S corporation and preserves the single-level-
of-tax treatment to S corporation shareholders.
    With regard to distributions by S corporations with AE&P, section 
1368(c) first applies the distribution to the S corporation's AAA. 
Section 1368(c)(1) provides that the portion of the distribution that 
does not exceed the S corporation's AAA is governed by section 1368(b) 
and is either not included in a shareholder's gross income (if that 
amount does not exceed the shareholder's adjusted basis in its S 
corporation stock) or is treated as gain from the sale or exchange of 
property (if that amount does not exceed the S corporation's AAA but 
exceeds the shareholder's adjusted basis in its S corporation stock). 
After the application of section 1368(c)(1), section 1368(c)(2) 
provides that any remaining portion of the distribution that exceeds 
the amount of the S corporation's AAA is treated as a dividend (as 
defined in section 316) to the extent of the S corporation's remaining 
AE&P. Lastly, under section 1368(c)(3), the portion of the distribution 
remaining after the application of section 1368(c)(1) and (2) is 
governed by section 1368(b) and either not included in gross income or 
treated as gain, depending on the shareholder's adjusted basis in its S 
corporation stock.
2. Treatment of S Corporations for Purposes of Subpart F
    Section 1373(a) provides that an S corporation is treated as a 
domestic partnership and its shareholders as partners of a domestic 
partnership for purposes of subpart F of the Code, which includes 
sections 951, 951A, and 958. Therefore, under Sec.  1.958-1(d)(1) of 
the final regulations, for purposes of determining section 951 or 
section 951A inclusions with respect to a CFC owned by an S 
corporation, the S corporation is not treated as owning the CFC's stock 
within the meaning of section 958(a). Instead, the CFC stock is treated 
as owned by a foreign partnership for purposes of determining the U.S. 
person that owns the CFC stock within the meaning of section 958(a).
    As a result, section 951 or section 951A inclusions with respect to 
CFC stock held by an S corporation are determined and taken into 
account at the S corporation shareholder level but only if the S 
corporation shareholder is a U.S shareholder of the CFC. With respect 
to S corporations with AE&P, this aggregate treatment does not increase 
the S corporation's AAA because any section 951 or section 951A 
inclusions are taken into account directly by the S corporation 
shareholders. An S corporation's AAA generally is increased, however, 
by dividends received by the S corporation from a foreign corporation 
even if the E&P from which the dividend distributions are made is 
attributable to amounts that are, or have been, included in gross 
income of one or more shareholders of the S corporation under section 
951(a) or 951A(a). See section 1368(e)(1)(A). In contrast, if section 
951 and 951A amounts were included by a S corporation, the S 
corporation's AAA would not be increased for distributions excluded 
from the S corporation's gross income pursuant to section 959(a).
3. Notice 2020-69
    In response to the final section 951A regulations, a comment 
asserted that aggregate treatment for purposes of computing section 
951A inclusions is inappropriate for S corporations, notwithstanding 
the language of section 1373(a) (treating an S corporation as a 
partnership and S corporation shareholders as partners of a 
partnership), particularly where an S corporation has AE&P. 
Specifically, the comment suggested that the aggregate approach creates 
a mismatch between when S corporation shareholders recognize income 
with respect to a CFC and the creation of AAA maintained by the S 
corporation. This mismatch can cause certain distributions out of AE&P 
made by an S corporation to be taxable to its shareholders despite the 
fact that the shareholders were already taxed on the CFC's earnings 
under the final section 951A regulations.
    Notice 2020-69, 2020-39 I.R.B. 604, released on September 1, 2020, 
announced that the Treasury Department and the IRS intend to issue 
regulations under section 958 to ease the transition of S corporations 
with AE&P on September 1, 2020, from the historic entity treatment (and 
the hybrid treatment under proposed Sec.  1.951A-5) to the aggregate 
treatment required under the final section 951A regulations (the ``S 
corporation transition approach''). Under the S corporation transition 
approach, an S corporation is subject to entity treatment with respect 
to a taxable year if (i) an election is made; (ii) the corporation has 
elected S corporation status before June 22, 2019; (iii) the S 
corporation would be treated as owning, within the meaning of section 
958(a), stock of a CFC on June 22, 2019, if entity treatment applied; 
(iv) the S corporation has ``transition AE&P'' on September 1, 2020, or 
on the first day of any subsequent taxable year; and (v) the S 
corporation maintains records to support the determination of the 
transition AE&P amount. Under this entity treatment, an S corporation 
that owns stock of a CFC is treated as owning, within the meaning of 
section 958(a), the CFC stock for purposes of applying section 951A 
such that the S corporation determines its GILTI inclusion amount, and 
its shareholders take into account their distributive share of that 
amount. Generally, an electing S corporation is treated as an entity 
under the S corporation transition approach until the first taxable 
year for which it has no transition AE&P on the first day of that year, 
at which point it is treated as an aggregate of its shareholders for 
that year and each successive year.

C. Related Person Insurance Income

    Section 952(a) provides that subpart F income includes insurance 
income, as defined in section 953. Under section 953(c)(2), RPII is any 
insurance income (as defined in section 953(a)) attributable to a 
policy of insurance or reinsurance that directly or indirectly insures 
a United States shareholder (as defined in section 953(c)(1)(A)) of the 
controlled foreign corporation (as defined in section 953(c)(1)(B)), or 
a person related to that shareholder. Under section 953(c)(1)(A), the 
term ``United States shareholder'' means, with respect to any foreign 
corporation, a U.S. person (as defined in section 957(c)) who owns 
(within the meaning of section 958(a)) any stock of the foreign 
corporation (``RPII U.S. shareholder''). Section 953(c)(1)(B) provides 
that the term ``controlled foreign corporation'' has the meaning given 
to such term by section 957(a) determined by substituting ``25 percent 
or more'' for ``more than 50 percent'' (``RPII CFC'').
    On April 17, 1991, the Treasury Department and the IRS published in 
the Federal Register proposed regulations under section 953 (INTL-939-
86, 56 FR 15540) (the ``1991 proposed regulations''). Section 1.953-3 
of the 1991 proposed regulations contains, among other provisions, 
general rules for determining RPII and definitions that apply for RPII 
purposes. Section 1.953-3(b)(1) of the 1991 proposed regulations 
defines RPII as premium and investment income attributable to a policy 
of insurance or reinsurance that provides insurance coverage to a 
related insured on risks located outside the RPII CFC's country of 
incorporation and also provides an analogous rule for annuity 
contracts.
    Section 1.953-3(b)(5) of the 1991 proposed regulations provides 
that insurance income attributable to a cross-insurance arrangement is 
treated as

[[Page 3895]]

RPII. In general, a cross-insurance arrangement is an arrangement in 
which a RPII CFC insures a person that is not a related insured and, as 
part of the same arrangement, another person insures a person that 
would be a related insured if insured by the RPII CFC.
    The cross-insurance rule was issued pursuant to section 
953(c)(8)(A), which as the Conference Report states, ``requires the 
Secretary to prescribe such regulations as may be necessary to carry 
out the purposes of the new sub-part F rules for captive insurers, 
including regulations preventing the avoidance of the new rules through 
cross-insurance arrangements or otherwise.'' H.R. Rep. No. 99-841 at 
II-620 (Sep. 18, 1986) (emphasis added). Congress recognized the need 
for regulations because cross-insurance can be used to replicate the 
economics and tax benefits of a captive insurance arrangement through 
cooperative risk sharing while improperly avoiding the application of 
section 953(c)(2). ``The conferees do not believe that U.S. 
shareholders should be able to obtain the deferral of U.S. tax on 
income attributable to insurance of risks of U.S. persons who are in 
turn insuring the risks of those shareholders. Accordingly, under the 
regulations, the income of the two companies in the example 
attributable to the insurance business described [in a cross-insurance 
arrangement] is to be treated as related person insurance income.'' Id. 
at II-621.
    Regulatory activity on the 1991 proposed regulations was suspended 
in 1999 due to the temporary enactment of changes to the definition of 
insurance income under section 953 and the temporary enactment of 
section 954(i) (together, the ``Insurance Active Financing 
Exception''). See Unified Agenda, 64 FR 21831 (Apr. 26, 1999). These 
statutory changes were adopted on a permanent basis by the Protecting 
Americans from Tax Hikes Act of 2015, Public Law 114-113 (Dec. 18, 
2015). Although much of the 1991 proposed regulations requires 
modification to account for the Insurance Active Financing Exception, 
other provisions in the 1991 proposed regulations, including the cross-
insurance rule, were not affected by the statutory changes.

V. Net Investment Income Tax

    Section 1411 imposes a 3.8-percent tax on the net investment income 
of certain individuals, trusts, and estates. Under Sec.  1.1411-10(g), 
an election can be made with respect to a CFC or PFIC that is a QEF to 
treat amounts included in income under section 951(a) or section 
1293(a)(1)(A) with respect to the CFC or QEF as net investment income 
for purposes of Sec.  1.1411-4(a)(1)(i), and to take amounts included 
in income under section 1293(a)(1)(B) into account for purposes of 
calculating the net gain attributable to dispositions of property under 
Sec.  1.1411-4(a)(1)(iii). Pursuant to Sec.  1.1411-10(g)(3), the 
election may be made by any individual, estate, trust, domestic 
partnership, S corporation, or common trust fund that owns the relevant 
CFC or QEF directly or indirectly through one or more foreign entities. 
In addition, if a domestic partnership, S corporation, estate, trust, 
or common trust fund that directly owns the CFC or QEF does not make 
the election, an individual, estate, trust, domestic partnership, S 
corporation, or common trust fund that owns the CFC or PFIC indirectly 
through the non-electing entity may itself make the election. Sec.  
1.1411-10(g)(3).

Explanation of Provisions

I. PFIC Rules

A. Definition of PFIC Shareholder

    The Treasury Department and the IRS have concluded that, because 
domestic partnerships and S corporations should be treated as 
aggregates of their partners and shareholders, respectively, for 
purposes of the QEF and MTM rules (see parts I.B.1 and I.C.1 of this 
Explanation of Provisions), the definition of shareholder under Sec.  
1.1291-1(b)(7) should be updated to reflect aggregate treatment for 
purposes of the PFIC regime. Thus, under the proposed regulations, 
neither domestic partnerships nor S corporations are considered 
shareholders for purposes of making QEF or MTM elections, recognizing 
QEF inclusions or MTM amounts, making PFIC purging elections, or filing 
Forms 8621. Proposed Sec. Sec.  1.1291-1(b)(7), 1.1295-1(j)(3), 1.1296-
1(a)(4).

B. QEF Rules

1. Treatment of Pass-Through Entities for Purposes of Sections 1293 and 
1295
    Various comments in response to the 2019 proposed regulations 
addressed the treatment of domestic partnerships as aggregates of their 
partners for purposes of the QEF rules. Some comments requested that 
domestic partnerships continue to be treated as PFIC shareholders for 
purposes of making QEF elections and recognizing QEF inclusions based 
on administrability considerations (including reducing compliance 
burdens for small partners) and access to information. Other comments 
recommended an aggregate approach to QEFs, citing consistency with 
section 951, section 951A, and other aspects of the PFIC regime 
(specifically sections 1291, 1294, and 1297(d)). Additionally, comments 
recommended that, because QEF inclusions are taken into account in 
computing taxable income at the partner level, a partner should 
determine whether the QEF rules apply. One comment recommended a 
transition to an aggregate approach to QEFs with an alternative that 
would permit a domestic partnership to make a QEF election on behalf of 
its partners if permitted under the partnership agreement.
    The Treasury Department and the IRS have concluded that it is more 
appropriate to treat domestic partnerships and S corporations as 
aggregates of their partners and shareholders, respectively, for 
purposes of sections 1293 and 1295. Aggregate treatment is consistent 
with the general treatment of partnerships for purposes of the PFIC 
regime under section 1298(a)(3) and aligns the QEF rules with the 
treatment of domestic partnerships and S corporations for purposes of 
the CFC overlap rule. It also provides partners and S corporation 
shareholders, the persons most affected by a QEF election, with the 
ability to decide whether to make the election. In addition, the new 
reporting by partnerships on Schedule K-2, ``Partners' Distributive 
Share Items--International,'' and Schedule K-3, ``Partner's Share of 
Income, Deductions, Credits, etc.--International'' is expected to 
facilitate a partner's ability to make the QEF election. The Treasury 
Department and the IRS are aware that in limited circumstances, as a 
result of certain nonconforming tax years between a partner and a 
partnership, the partner may be required to file its return on which it 
makes a QEF election (and includes its QEF inclusion) before the 
deadline for the partnership to provide it with Schedule K-3. In such a 
case, the Treasury Department and the IRS expect that a partner seeking 
to make a QEF election will make arrangements with the partnership to 
provide the partner with the necessary information in a timely fashion.
    Accordingly, the proposed regulations provide that a partner or S 
corporation shareholder, rather than the domestic partnership or S 
corporation, respectively, makes a QEF election, and each electing 
partner or S corporation shareholder must notify the partnership or S 
corporation, respectively, of the election to assist the partnership or 
S corporation with information reporting and tracking basis in the QEF 
stock. Proposed Sec.  1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A). 
Similarly, partners and S corporation shareholders include their

[[Page 3896]]

pro rata shares of ordinary earnings and net capital gain attributable 
to the QEF stock as if such shareholder owned its share of the QEF 
stock directly, and not as a share of the pass-through entity's income. 
See proposed Sec.  1.1293-1(c)(1). Contrary to the current regulations, 
however, a QEF election made under proposed Sec.  1.1295-1(d)(2)(i)(A) 
or (d)(2)(ii)(A) by a partner or S corporation shareholder with respect 
to PFIC stock held indirectly through a domestic partnership or S 
corporation applies to all stock of that PFIC owned by such partner or 
S corporation shareholder, even if owned outside of the partnership or 
S corporation.
    In response to the comments' concerns regarding the 
administrability of partner-level QEF elections, the Treasury 
Department and the IRS request comments on whether final regulations 
should permit a domestic partnership- or S corporation-level QEF 
election on behalf of its partners or shareholders, respectively, in 
conjunction with the general rule requiring the partner or shareholder 
to make the election. Comments should specifically address (i) the 
legal mechanism by which the domestic partnership or S corporation 
would be delegated the ability to make a QEF election on behalf of its 
partners or shareholders; (ii) the standard of delegation that should 
be required, including whether delegation should be based on the 
partnership agreement or the S corporation's organizational documents, 
or some other instrument, and, if so, whether delegation should be 
explicit or implicit within the instrument; (iii) whether the domestic 
partnership or S corporation's election should be binding on all 
partners or shareholders, or only on certain partners or shareholders; 
(iv) if binding on all partners or shareholders, whether certain 
partners or shareholders should be allowed to opt out and whether an 
opt-out is consistent with the current rules; and (v) the timing, 
filing, and notification requirements that should apply to a domestic 
partnership- or S corporation-level QEF election, taking into account 
the possibility of nonconforming taxable years among the partners and 
partnership (or shareholders and S corporation) and the QEF.
2. Transfers of Stock to Domestic Pass-Through Entities
    The current regulations include special rules that apply when stock 
of a PFIC subject to a QEF election is transferred to a domestic pass-
through entity, depending on whether the transferee entity makes a QEF 
election with respect to the transferred PFIC. Under Sec.  1.1293-
1(c)(2)(i), if PFIC stock subject to a QEF election is transferred to a 
domestic pass-through entity of which the transferor is an interest 
holder, and the transferee pass-through entity makes a QEF election 
with respect to the PFIC, thereafter the transferor and other interest 
holders that become PFIC shareholders as a result of the transfer begin 
taking into account their pro rata shares of the pass-through entity's 
QEF inclusions. However, under Sec.  1.1293-1(c)(2)(ii), if the 
transferee pass-through entity does not make a QEF election with 
respect to the transferred PFIC, the transferor-shareholder (but not 
other indirect shareholders resulting from the transfer) continues to 
be subject to QEF inclusions with respect to the PFIC.
    To provide consistency with the aggregate treatment of domestic 
partnerships and S corporations under the QEF rules, the proposed 
regulations provide that, if a shareholder transfers stock of a PFIC 
with respect to which it has made a QEF election to a pass-through 
entity, the transferor continues to be subject to QEF inclusions with 
respect to the transferred stock, and the other interest holders of the 
pass-through entity are subject to QEF inclusions from the PFIC only if 
they make a QEF election with respect to the transferred stock. 
Proposed Sec.  1.1293-1(c)(3)(i) and (ii). However, because domestic 
nongrantor trusts continue to be shareholders for purposes of the QEF 
rules, the proposed regulations retain the rule in current Sec.  
1.1293-1(c)(2)(i) but limit its application to domestic nongrantor 
trusts. Therefore, if stock of a PFIC subject to a QEF election is 
transferred to a domestic nongrantor trust, and the transferee trust 
makes a QEF election with respect to the stock, the electing trust 
includes its pro rata share of the QEF inclusions, and its 
beneficiaries account for such amounts according to the general rules 
applicable to inclusions of income from the trust. See proposed Sec.  
1.1293-1(c)(3)(iii). If the domestic nongrantor trust does not make a 
QEF election with respect to the transferred stock, only the transferor 
is subject to QEF inclusions with respect to the transferred stock. Id.
3. Continuation of Preexisting QEF Elections
    The Treasury Department and the IRS have concluded that QEF 
elections made by a domestic partnership or S corporation that are 
effective for taxable years of a PFIC ending on or before the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register (such PFIC a ``preexisting QEF,'' 
and the election, a ``preexisting QEF election'') will continue for any 
partner or S corporation shareholder owning an interest in a 
preexisting QEF on that date. See proposed Sec.  1.1295-1(d)(2)(i)(B), 
(d)(2)(ii)(B), and (f)(3). Treating the preexisting QEF elections as if 
they were effectively made by each partner or S corporation shareholder 
owning an interest in the preexisting QEF before the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register should minimize the number of 
additional QEF elections required by partners and S corporation 
shareholders, thus making the QEF rules more administrable for 
taxpayers and the IRS when transitioning from the historic entity 
approach to the aggregate approach of the proposed regulations. 
However, although a new election is not required to be made with 
respect to a preexisting QEF by partners or S corporation shareholders 
that indirectly owned the QEF before the finalization of the proposed 
regulations, they are subject to QEF inclusions under the new aggregate 
approach. See proposed Sec.  1.1293-1(c)(1).
4. Additional Changes to QEF Rules
    The proposed regulations make several modifications to the rules 
that characterize stock held through a pass-through entity under Sec.  
1.1295-1(b)(3)(iv). First, consistent with the general aggregate 
approach to domestic pass-through entities under the QEF rules (other 
than domestic nongrantor trusts and domestic estates), the rule now 
governs how stock of a PFIC will be treated as stock of a pedigreed QEF 
to a shareholder, as defined in proposed Sec.  1.1295-1(j)(3), rather 
than all interest holders or beneficiaries of a pass-through entity as 
under the current provision. This paragraph is also modified to address 
both the treatment of PFICs as pedigreed QEFs to shareholders owning 
such PFICs through domestic partnerships and S corporations that have 
made preexisting QEF elections, and the treatment of PFICs owned 
through domestic pass-through entities (other than domestic nongrantor 
trusts and domestic estates) to shareholders making the QEF election. 
Further, the rule addresses the treatment of PFICs as pedigreed QEFs 
when PFIC stock is acquired by, or transferred to, pass-through 
entities. See proposed Sec.  1.1295-1(b)(3)(iv)(A) through (C). 
Additionally, in order to ensure the proper application of proposed 
Sec.  1.1295-1(b)(3)(iv), proposed Sec.  1.1295-1(b)(3)(iv)(A) and (B) 
do not

[[Page 3897]]

apply to transactions in which gain is not fully recognized.
    The proposed regulations also make several changes to conform Sec.  
1.1295-1 to the general aggregate treatment of domestic pass-through 
entities (other than domestic non-grantor trusts and domestic estates) 
under the QEF rules. These changes include (i) limiting the application 
of paragraphs (b)(3)(i) and (ii) to domestic nongrantor trusts and 
domestic estates, which are the only domestic pass-through entities 
that may make a QEF election under the proposed regulations; (ii) 
applying the partnership termination rule only with respect to 
partnerships that have made preexisting QEF elections and their 
partners; (iii) revising rules governing the treatment of PFIC stock 
distributed by a partnership as stock of a pedigreed QEF to transferee 
partners; and (iv) providing that shareholders owning QEF stock through 
a domestic partnership or S corporation that has made a preexisting QEF 
election are required to file Form 8621 for such QEFs. Proposed Sec.  
1.1295-1(b)(3)(i) through (iii) and (v) and (f)(2)(i). In addition, the 
proposed regulations remove the rule in Sec.  1.1295-1(i)(1)(ii) that 
allows the Commissioner to invalidate a pass-through entity QEF 
election with respect to a shareholder if, as a result of nonconforming 
taxable years between the shareholder and a pass-through entity, the 
QEF inclusion is not included in income within two years of the PFIC's 
year end. The rule was removed because it specifically applies to pass-
through entity QEF elections and inclusions, which, as a result of 
aggregate treatment, generally will only be relevant in limited 
circumstances involving domestic trusts. The Commissioner continues to 
have discretion to invalidate or terminate a shareholder's QEF election 
in appropriate circumstances if the requirements of section 1295 are 
not met by a shareholder, an intermediary, or the relevant PFIC. Sec.  
1.1295-1(i)(1)(i).

C. MTM Rules

1. Treatment of Pass-Through Entities for Purposes of Section 1296
    The Treasury Department and the IRS received comments addressing 
the treatment of domestic partnerships as aggregates of their partners 
for purposes of the MTM rules, which generally were similar to the 
comments received with respect to QEFs. For reasons similar to those 
noted for QEFs, some comments recommended maintaining entity treatment 
of domestic partnerships under the MTM rules for administrability 
reasons, such as reduced compliance burdens for small partners and 
limited access to information. Other comments recommended an aggregate 
approach to maintain consistency with sections 951 and 951A and the 
PFIC regime (including the comments' proposed aggregate treatment of 
domestic partnerships for the QEF rules) and to allow the persons most 
affected by a MTM election, the partners, to determine whether the MTM 
rules apply. The comment discussed in part I.B.1 of this Explanation of 
Provisions that recommended an alternative that would permit a domestic 
partnership to make a QEF election on behalf of its partners made the 
same recommendation with respect to MTM elections.
    For the reasons noted by the comments recommending an aggregate 
approach and to further consistency in the treatment of domestic 
partnerships and S corporations across the PFIC regime, the Treasury 
Department and the IRS have concluded that domestic partnerships and S 
corporations should also be treated as aggregates of their partners and 
shareholders, respectively, for purposes of the MTM rules. Accordingly, 
the proposed regulations extend aggregate treatment to domestic 
partnerships and S corporations for purposes of the MTM rules by 
providing that the MTM rules apply to PFIC shareholders, as defined in 
proposed Sec.  1.1291-1(b)(7), which term does not include domestic 
partnerships or S corporations. See proposed Sec.  1.1296-1(a)(4) and 
(e). As a result, partners of a domestic partnership or S corporation 
shareholders make an MTM election with respect to PFIC stock owned 
through the partnership or S corporation and determine their own MTM 
gain or loss, rather than taking into account their distributive share 
of the domestic partnership or S corporation's MTM gain or loss. See 
proposed Sec.  1.1296-1(b)(1) and (c)(1) and (3). Partners and S 
corporation shareholders making an MTM election with respect to a PFIC 
held through a partnership or S corporation, respectively, must notify 
the partnership or S corporation of the election to assist the 
partnership or S corporation with information reporting and tracking 
basis in the PFIC stock. Proposed Sec.  1.1296-1(h)(1)(i)(B). 
Incorporating the proposed Sec.  1.1291-1(b)(7) definition of 
shareholder into Sec.  1.1296-1 also clarifies that the MTM rules apply 
to grantors of domestic grantor trusts that own PFIC stock, and that 
domestic nongrantor trusts and domestic estates continue to be treated 
as entities for purposes of the MTM rules.
    To reflect the transition to the aggregate treatment of domestic 
partnerships and S corporations for purposes of the MTM rules, various 
other conforming changes are made to apply the MTM rules to PFIC 
shareholders rather than U.S. persons. See proposed Sec.  1.1296-
1(b)(2) and (3); Sec.  1.1296-1(c)(5); Sec.  1.1296-1(d)(1) and (2); 
Sec.  1.1296-1(e) and (f); Sec.  1.1296-1(g)(1) and (2); Sec.  1.1296-
1(h)(1)(i) and (ii); Sec.  1.1296-1(h)(2)(ii); Sec.  1.1296-1(h)(3); 
and Sec.  1.1296-1(i)(1). Additionally, the rule in Sec.  1.1296-
1(g)(3), providing that when an MTM PFIC is owned through certain 
foreign pass-through entities any MTM gain or loss is determined as of 
the end of the foreign pass-through entity's tax year, has been 
removed. Under the general aggregate treatment of pass-through entities 
(besides domestic nongrantor trusts and domestic estates) for purposes 
of the MTM rules, the appropriate taxable year with respect to which 
any MTM gain or loss is determined is the taxable year end of the 
shareholder that owns the MTM PFIC through a pass-through entity, not 
the pass-through entity's taxable year.
    As in part I.B.1 of this Explanation of Provisions, the Treasury 
Department and the IRS request comments on whether a form of 
partnership- or S corporation-level MTM election could be accommodated 
in final regulations. Comments should address the same considerations 
noted in part I.B.1 of this Explanation of Provisions regarding the 
delegation of authority to make an MTM election to a domestic 
partnership or S corporation.
2. Continuation of Preexisting MTM Elections
    The Treasury Department and the IRS have concluded that MTM 
elections made with respect to a PFIC by a domestic partnership or S 
corporation for taxable years of the PFIC ending on or before the date 
of publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register (``preexisting MTM election'') 
should be treated as made by any partner or S corporation shareholder 
owning its interest on that date. This treatment should minimize the 
number of additional MTM elections that would be made by such partners 
or S corporation shareholders, thus making the MTM rules more 
administrable for taxpayers and the IRS as a result of the transition 
from the historic entity approach to the aggregate approach of the 
proposed regulations. Accordingly, MTM elections made by domestic

[[Page 3898]]

partnerships and S corporations effective for taxable years of a PFIC 
ending on or before finalization of the proposed regulations under 
proposed Sec.  1.1296-1(h)(1)(i)(A) continue to be valid and will be 
treated as made by the owners of such entities. As a result, going 
forward the owners of those entities will determine their MTM gain or 
loss as if they held the section 1296 stock directly.
3. Modifications to the MTM Coordination Rule
    Under section 1296(j) and Sec.  1.1296-1(i), if a taxpayer makes an 
MTM election with respect to a foreign corporation that was a PFIC 
(other than a QEF) before the first taxable year to which the MTM 
election was effective, the excess distribution rules apply to any (i) 
distributions by the PFIC with respect to the section 1296 stock; (ii) 
disposition of the section 1296 stock; and (iii) MTM gain recognized on 
the last day of the U.S. person's taxable year (the ``MTM coordination 
rule''). Before the proposed regulations, if section 1296 stock subject 
to the MTM coordination rule was held by a domestic partnership or S 
corporation, it may have been unclear how to apply the MTM coordination 
rule since the excess distribution rules are not applied at the 
domestic partnership or S corporation level.
    Accordingly, to conform to the general transition to an aggregate 
approach under the MTM rules, the proposed regulations clarify that the 
MTM coordination rule is applied to a PFIC shareholder. See proposed 
Sec.  1.1296-1(i)(2) introductory text and (i)(2)(ii). To coordinate 
with MTM rules other than those under section 1296, the proposed 
regulations also modify Sec.  1.1291-1(c)(4)(ii) so that computations 
apply to PFIC shareholders.

D. CFC Overlap Rule

1. Application Based on Aggregate Treatment for Sections 951 and 951A
    The CFC overlap rule provides that, for purposes of the PFIC 
regime, a corporation is not treated as a PFIC with respect to a 
shareholder during the qualified portion of the shareholder's holding 
period with respect to stock in the corporation. Section 1297(d)(1). 
Thus, this rule applies separately with respect to each shareholder of 
the foreign corporation, and the foreign corporation may be a PFIC with 
respect to one shareholder but not another. The CFC overlap rule was 
intended to eliminate the simultaneous application of the subpart F and 
PFIC regimes only for a shareholder that is ``subject to current 
inclusion under the subpart F rules.'' H.R. Rep. 105-148 at 534.
    Under the final regulations (and Sec.  1.951A-1(e) as applicable 
before the final regulations), domestic partnerships and S corporations 
do not have inclusions under section 951 or section 951A and, because 
the inclusions are instead determined directly and solely by the 
partners or S corporation shareholders that are U.S. shareholders, 
partners and S corporation shareholders that are not U.S. shareholders 
do not have section 951 or section 951A inclusions. See Sec.  1.958-
1(d)(1). Thus, a U.S. person that is not a U.S. shareholder of a 
foreign corporation that would otherwise be a PFIC with respect to that 
person if held directly should not be permitted to rely on the CFC 
overlap rule to avoid the PFIC regime simply because the U.S. person 
owns its interest in the foreign corporation indirectly through a 
domestic partnership or S corporation.
    Although section 1297(d) does not define the term ``shareholder'' 
for this purpose, under Sec.  1.1291-1(b)(7), a domestic partnership or 
S corporation is not a shareholder to which the CFC overlap rule 
applies.\2\ Thus, this regulation sets forth an exception to the 
general rule in section 1298(a)(1)(B), which provides that a U.S. 
person is not treated as constructively owning stock that is owned by 
another U.S. person (including, for example, a domestic partnership). 
Accordingly, under the general rule of section 1298(a)(1)(A), 
constructive ownership of PFIC stock under section 1298(a) applies to 
the extent that the effect is to treat PFIC stock held by a domestic 
partnership or S corporation as owned by partners and shareholders of 
the entities that are U.S. persons. The ownership provisions of section 
1298(a), in turn, apply for purposes of sections 1291 through 1298, 
including section 1297(d). Thus, neither a domestic partnership nor an 
S corporation is a shareholder for purposes of section 1297(d) by 
operation of Sec.  1.1291-1(b)(7), notwithstanding that, under Sec.  
1.958-1(d)(2)(i), a domestic partnership or an S corporation may be a 
U.S. shareholder of the foreign corporation within the meaning of 
section 951(b). Consistent with this aggregate approach to section 951 
and section 951A in applying the CFC overlap rule under the existing 
regulations, the proposed regulations confirm that for purposes of 
section 1297(d), the term ``qualified portion'' does not include any 
portion of a domestic partner or S corporation shareholder's holding 
period during which the partner or shareholder was not a U.S. 
shareholder with respect to the CFC/PFIC. Proposed Sec.  1.1291-
1(c)(5)(i).
---------------------------------------------------------------------------

    \2\ Section 1.1291-1(b)(7) provides that a PFIC shareholder is a 
U.S. person that directly owns PFIC stock or that is an indirect 
shareholder under Sec.  1.1291-1(b)(8); further, it states that for 
purposes of sections 1291 and 1298, neither a domestic partnership 
nor an S corporation is treated as a PFIC shareholder, except for 
information reporting purposes. This definition of shareholder was 
first adopted as a temporary regulation, applicable to taxable years 
of shareholders ending on or after December 31, 2013 (T.D. 9650, 78 
FR 79602, 79608 (Dec. 31, 2013)) and was subsequently issued as a 
final regulation without substantive change with the same 
applicability date (T.D. 9806, 81 FR 95459, 95465 (Dec. 28, 2016)). 
Both temporary and final Sec.  1.1291-1(b)(7) were issued after 
several private letter rulings (``PLRs''), such as PLR 201108020 
(Feb. 25, 2011) and PLR 200943004 (Oct. 23, 2009), which were issued 
with respect to the application of section 1297(d) to domestic 
partnerships.
---------------------------------------------------------------------------

2. Transition Rule for Entity Treatment
    Although the CFC overlap rule, in conjunction with the shareholder 
definition in Sec.  1.1291-1(b)(7), properly reflects the aggregate 
approach to subpart F (as discussed in part III.A of this Explanation 
of Provisions), the Treasury Department and the IRS have determined 
that the application of these rules could lead to inappropriate results 
under the entity approach to subpart F that applied under prior law. In 
particular, under entity treatment for subpart F, the CFC overlap rule 
would not apply with respect to partners or S corporation shareholders 
of the CFC/PFIC that were not U.S. shareholders even though they would 
take into account their share of inclusions of the domestic partnership 
or S corporation under section 951 and, as applicable, section 951A. 
Thus, the CFC/PFIC would be treated as a PFIC with respect to such 
partners or S corporation shareholders even though the partner or 
shareholder was subject to current inclusions under the subpart F 
regime.
    Accordingly, the Treasury Department and the IRS have determined 
that it is appropriate to provide a transition rule that would apply to 
taxable years of shareholders beginning before the date of publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register, or for taxable years of shareholders of an S 
corporation in which the S corporation elects to apply Sec.  1.958-
1(e). When this transition rule applies, the CFC overlap rule will 
benefit certain persons that are indirect PFIC shareholders, but not 
U.S. shareholders, due to owning stock of foreign corporations through 
domestic partnerships or S corporations, during periods when the 
shareholder was subject to current inclusions under section 951 or 
section 951A (for example, under the rules described in Notices 2019-46 
and 2020-69) as a

[[Page 3899]]

share of a domestic partnership or S corporation's income inclusions. 
Proposed Sec.  1.1291-1(c)(5)(ii).

E. PFIC Purging Elections

    Under the current regulations, it may be unclear whether a domestic 
partnership or an S corporation that owns PFIC stock is eligible to 
make a PFIC purging election, particularly with respect to the section 
1291 purging elections, both of which require simultaneous QEF 
elections that are generally made by domestic partnerships and S 
corporations.
    Consistent with the aggregate treatment of domestic partnerships 
and S corporations for purposes of making elections and determining 
income inclusions within the PFIC regime, the Treasury Department and 
the IRS have determined that the PFIC purging elections with respect to 
PFICs owned by partnerships and S corporations should be made at the 
partner or shareholder level because each of the PFIC purging elections 
can result in the recognition of excess distributions under section 
1291, and those inclusions are directly taken into account at the 
partner or shareholder level and rely on partner or shareholder 
specific tax attributes, such as holding period. Each PFIC purging 
election is made by a shareholder as defined in proposed Sec.  1.1291-
1(b)(7), which has been modified to make explicit that neither domestic 
partnerships nor S corporations are PFIC shareholders for any purpose. 
As a result, under the proposed regulations, PFIC purging elections are 
made at the partner or S corporation shareholder level.

F. PFIC Information Reporting

    Consistent with the aggregate treatment of domestic partnerships 
and S corporations for purposes of the QEF and MTM rules, the Treasury 
Department and the IRS have concluded that domestic partnerships and S 
corporations should no longer be required to file an annual report 
(Form 8621) under section 1298(f) and Sec.  1.1298-1. The requirement 
to file Form 8621 applies only to PFIC shareholders within the meaning 
of Sec.  1.1291-1(b)(7), which includes, for example, partners or S 
corporation shareholders that indirectly own PFICs through domestic 
partnerships or S corporations. Sec.  1.1298-1(a). Domestic 
partnerships and S corporations will not be subject to this filing 
obligation due to the revised definition of shareholder in proposed 
Sec.  1.1291-1(b)(7), under which domestic partnerships and S 
corporations are not PFIC shareholders for any purpose.
    To reflect this change, proposed Sec.  1.1298-1(b)(1) revises the 
general rule requiring a PFIC shareholder to file Form 8621 to clarify 
that the requirement applies to PFIC shareholders as defined in Sec.  
1.1291-1(b)(7). Additionally, proposed Sec.  1.1298-1(b)(1)(i) and (ii) 
provides that the general rule concerning who has to file Form 8621 
with respect to a PFIC applies to a PFIC shareholder that is either (i) 
a direct PFIC shareholder or (ii) an indirect PFIC shareholder (within 
the meaning of Sec.  1.1291-1(b)(8)) that holds an interest in a PFIC 
through one or more entities, each of which is not a PFIC shareholder 
within the meaning of Sec.  1.1291-1(b)(7). As a result, because a 
domestic grantor trust is not a PFIC shareholder within the meaning of 
Sec.  1.1291-1(b)(7), the proposed regulations remove Sec.  1.1298-
1(b)(1)(iii). Similarly, the proposed regulations remove Sec.  1.1298-
1(c)(6) because domestic partnerships are not PFIC shareholders under 
proposed Sec.  1.1291-1(b)(7) and thus have no filing obligation under 
the proposed regulations.
    These changes limit the application of Sec.  1.1298-1(b)(2) (which 
currently requires certain indirect shareholders to file Form 8621 when 
those shareholders own an interest in a PFIC through one or more U.S. 
persons) to only beneficiaries of domestic estates and domestic 
nongrantor trusts, because an indirect PFIC shareholder owning stock in 
a PFIC through a domestic partnership, S corporation, or domestic 
grantor trust will be required to file a Form 8621 under proposed Sec.  
1.1298-1(b)(1)(ii). An indirect PFIC shareholder owning stock of a PFIC 
by reason of an interest in a domestic estate or domestic nongrantor 
trust that recognizes its share of the estate or trust's QEF inclusions 
or MTM amounts would continue to be able to rely on the exception of 
Sec.  1.1298-1(b)(2)(ii) if the domestic estate or domestic nongrantor 
trust files Form 8621 with respect to the QEF or MTM PFIC. The proposed 
regulations remove the last sentence of Sec.  1.1298-1(b)(2)(ii) 
regarding the inability to apply the exception with respect to stock in 
a QEF contributed to domestic partnerships or S corporations, because 
these entities cannot make a QEF election under the proposed 
regulations.
    The changes to the section 1298(f) information reporting 
requirements in proposed Sec.  1.1298-1 reflect the general shift in 
the treatment of domestic partnerships and S corporations as aggregates 
for purposes of the PFIC regime. While these changes represent a change 
in the PFIC shareholders required to file an annual report under 
section 1298(f), a domestic partnership or S corporation will continue 
to have a responsibility to report information with respect to the 
PFICs it owns to its interest holders on Schedule K-3, ``Partner's 
Share of Income, Deductions, Credits, etc.--International,'' of Forms 
1065, ``U.S. Return of Partnership Income,'' and 1120-S, ``U.S. Income 
Tax Return for an S Corporation,'' respectively, when required. The 
general information reporting obligations of domestic partnerships and 
S corporations with respect to their interest holders should result in 
the interest holders receiving the information required to satisfy 
their filing obligations under section 1298(f).

G. Other Changes

1. Section 1297(e) PFICs
    The term ``section 1297(e) PFIC'' and other associated references 
to ``section 1297(e)'' related to section 1297(e) before it was re-
designated as current section 1297(d) by the Tax Technical Corrections 
Act of 2007. Accordingly, the proposed regulations change the defined 
term ``section 1297(e) PFIC'' to ``section 1297(d) PFIC'' and replace 
references to ``section 1297(e) PFICs'' and ``section 1297(e)(2)'' with 
references to ``section 1297(d) PFICs'' and ``section 1297(d)(2),'' 
respectively.
2. Changes to Definition of Post-1986 Earnings and Profits
    The term ``post-1986 earnings and profits'' is the basis upon which 
a deemed dividend under Sec. Sec.  1.1291-9, 1.1297-3, and 1.1298-3 is 
determined, and each of those sections generally defines the term by 
reference to the definition of ``undistributed earnings, within the 
meaning of section 902(c).'' However, because section 902 was repealed 
by the Tax Cuts and Jobs Act, Public Law 115-97, December 22, 2017, 131 
Stat 2054 (``TCJA''), the proposed regulations revise the definition of 
post-1986 earnings and profits in Sec. Sec.  1.1291-9(a)(2)(i), 1.1297-
3(c)(3)(i)(A), and 1.1298-3(c)(3)(i) to eliminate references to section 
902(c) and to define the term by reference to earnings and profits 
computed in accordance with sections 964(a) and 986.

II. Subpart F Rules

A. Modifications to Sec.  1.964-1(c), Including Determination of 
Controlling Domestic Shareholders

    As discussed in part IV.A of the Background section of this 
preamble, the final regulations do not extend aggregate treatment for 
purposes of determining controlling domestic

[[Page 3900]]

shareholders of foreign corporations. Nevertheless, the Treasury 
Department and the IRS have further considered the benefits of 
maintaining entity treatment of domestic partnerships for purposes of 
determining the controlling domestic shareholders of a CFC, including 
the administrative convenience of centralizing the various actions 
taken by controlling domestic shareholders, and have concluded that 
such actions should generally be taken by those persons whose tax 
liability is directly affected thereby. Accordingly, the Treasury 
Department and the IRS have concluded that domestic partnerships should 
be treated as aggregates for purposes of determining whether a U.S. 
shareholder is a controlling domestic shareholder of a CFC. This 
approach is consistent with the final regulations, which provide that 
neither section 951 nor section 951A inclusions arise at the U.S. 
shareholder partnership level but instead arise directly to U.S. 
shareholder partners. In other words, actions that affect the 
determination of inclusions under sections 951 and 951A are determined 
by the same persons that have the direct inclusions under those 
provisions.
    Accordingly, proposed Sec.  1.958-1(d)(1) provides that domestic 
partnerships are not considered to own stock of a foreign corporation 
under section 958(a) for purposes of Sec.  1.964-1(c) as well as any 
provision that specifically applies by reference to Sec.  1.964-1(c). 
As a result, domestic partnerships and S corporations (by virtue of 
section 1373(a)) would be treated as aggregates of their partners and 
shareholders, respectively, for purposes of determining the controlling 
domestic shareholders of foreign corporations under the proposed 
regulations.
    In addition to applying for purposes of determining the controlling 
domestic shareholders of a foreign corporation, aggregate treatment 
also generally applies for purposes of the notice requirement of Sec.  
1.964-1(c)(3)(iii). Extending aggregate treatment to this notice 
requirement ensures that other persons known by the controlling 
domestic shareholders to be U.S. persons that own (within the meaning 
of section 958(a)) stock of a foreign corporation (``domestic 
shareholders'') through a domestic partnership (but that are not 
themselves controlling domestic shareholders) are made aware of any 
action undertaken by the controlling domestic shareholders under Sec.  
1.964-1(c)(3). However, proposed Sec.  1.964-1(c)(3)(iii)(B) provides 
that a controlling domestic shareholder is deemed to satisfy the notice 
requirement with respect to domestic shareholders that are partners in 
a domestic partnership by providing the notice to the domestic 
partnership (known to the controlling domestic shareholder) through 
which the domestic shareholders own stock of the foreign corporation, 
which could then provide the notice to its partners that are domestic 
shareholders. Additionally, to help facilitate notice to the person 
that prepares and maintains the foreign corporation's books and records 
for U.S. federal income tax purposes, notice is also required to be 
provided to any U.S. person (such as a domestic partnership) that 
controls, within the meaning of section 6038(e), the foreign 
corporation (in other words, any U.S. person that is a Category 4 filer 
of Form 5471, ``Information Return of U.S. Persons With Respect to 
Certain Foreign Corporations,'' with respect to the foreign 
corporation).
    Additionally, in light of the repeal of section 902 as part of the 
TCJA, the proposed regulations replace the term ``noncontrolled section 
902 corporation'' in Sec.  1.964-1(c)(5)(ii) with the term 
``noncontrolled foreign corporation,'' which is defined as any foreign 
corporation (other than a CFC as defined in section 957 or section 953) 
as to which a U.S. shareholder owns stock within the meaning of section 
958(a). Proposed Sec.  1.964-1(c)(5)(ii). The proposed regulations 
similarly replace the term ``majority domestic corporate shareholders'' 
with the term ``majority domestic shareholders,'' to reflect the repeal 
of section 902. Id.

B. Treatment of S Corporations With AE&P

    After the issuance of Notice 2020-69 (announcing an intent to issue 
regulations adopting the S corporation transition approach), a comment 
requested additional guidance on issues applicable to S corporations 
under sections 951 and 951A. Specifically, the comment requested (i) 
transition rules for taxpayers that elected into the S corporation 
transition approach; (ii) guidance on the aggregate treatment of S 
corporations for purposes of sections 951 and 951A; and (iii) the 
ability of all S corporations to elect entity treatment similar to the 
S corporation transition approach described in Notice 2020-69, 
regardless of whether the S corporation has AE&P.\3\
---------------------------------------------------------------------------

    \3\ This comment also requested guidance to (i) clarify the 
determination of a partner's proportionate share of CFC stock in 
accordance with the allocation of tested items under section 951A to 
a U.S. shareholder that owns stock in a CFC through an interest in a 
partnership and (ii) provide rules on the allocation of tested items 
under section 951A and on the maintenance of previously-taxed 
earnings and profits (``PTEP'') accounts. The long-standing issues 
of measuring a partner's proportionate share of income under subpart 
F as well as the treatment of targeted capital accounts are outside 
the scope of these proposed regulations and therefore are not 
addressed. With respect to the request for guidance related to PTEP, 
the Treasury Department and the IRS intend to separately address 
certain issues pertaining to partnerships and S corporations. In 
particular, this guidance will include rules to address the 
transition of S corporations from entity treatment to aggregate 
treatment as noted in section 3.04 of Notice 2020-69.
---------------------------------------------------------------------------

    The proposed regulations adopt the S corporation transition 
approach, as described in Notice 2020-69. See proposed Sec.  1.958-
1(e). The Treasury Department and the IRS have concluded that the S 
corporation transition approach in the proposed regulations 
appropriately smooths the transition for S corporations to be on an 
equal footing with domestic partnerships. The S corporation transition 
approach ensures that amounts corresponding to income of a CFC already 
taxed to S corporation shareholders can, even without being distributed 
by the CFC, be distributed tax-free by the S corporation and have 
priority over distributions of C corporation AE&P, while the latter 
will continue to be taxed as dividends when distributed, consistent 
with section 1368. Because section 951 and section 951A inclusions at 
the entity level will generate AAA, S corporations with AE&P will be 
able to make distributions to shareholders with respect to those 
amounts rather than distributions of dividends out of AE&P.
    The proposed regulations do not extend the S corporation transition 
approach to all S corporations, regardless of AE&P. The Treasury 
Department and the IRS believe that permitting all S corporations to 
elect to be treated as an entity for purposes of sections 951 and 951A 
is inconsistent with section 1373(a) and the aggregate approach adopted 
in the final section 951A regulations and the final regulations. 
Further, the Treasury Department and the IRS have determined that, in 
recognition of certain issues specific to S corporations with AE&P as 
of a certain date, the S corporation transition approach, with its 
conditions, sufficiently transitions those S corporations that elect 
entity treatment to the aggregate treatment provided in the final 
section 951A regulations and the final regulations. Accordingly, this 
comment is not adopted.

C. Entity Treatment Under Section 951A and Inapplicability of Penalties

    The proposed regulations include the rules announced in Notice 
2019-46 that permit domestic partnerships and S

[[Page 3901]]

corporations to apply the hybrid approach for taxable years ending 
before June 22, 2019. Consistent with Notice 2019-46, to apply the 
hybrid approach, domestic partnerships and S corporations must satisfy 
certain notice requirements. Proposed Sec.  1.951A-1(e)(2)(i) and 
(iii). In addition, if the domestic partnership or S corporation 
satisfies these notification requirements it will not be subject to 
certain penalties for failures to file or furnish statements to the 
extent such failures arise from acting consistently with the 2018 
proposed regulations before June 22, 2019. Proposed Sec.  1.951A-
1(e)(2)(ii).

D. Related Person Insurance Income

1. Aggregate Treatment of Partnerships
    A comment in response to the 2019 proposed regulations requested 
that aggregate treatment be applied to domestic partnerships for 
purposes of determining RPII and that domestic partnerships be treated 
the same way as foreign partnerships for this purpose. In addition, the 
Treasury Department and the IRS recognize that treating a domestic 
partnership as an entity for purposes of section 953(c) could produce 
disproportionate RPII inclusions in light of the special rules 
contained in section 953(c)(5). Therefore, proposed Sec.  1.958-1(d)(1) 
modifies the list of provisions subject to aggregate treatment to 
include section 953(c), and a domestic partnership is not treated as a 
RPII U.S. shareholder for the purpose of characterizing income as RPII. 
The proposed regulations, however, provide that Sec.  1.958-1(d)(1) 
does not apply for purposes of section 953(c)(1)(A) in determining 
whether any foreign corporation is a controlled foreign corporation as 
defined in section 953(c)(1)(B), 953(c)(3)(E), or 953(d)(1)(A). 
Proposed Sec.  1.958-1(d)(2)(v). This approach is consistent with Sec.  
1.958-1(d)(2)(ii) (providing that Sec.  1.958-1(d)(1) does not apply 
for purposes of determining whether a foreign corporation is a 
controlled foreign corporation as defined in section 957).
    Corresponding changes are made to the definition of RPII under 
proposed Sec.  1.953-3 to conform with the aggregate treatment of 
partnerships under proposed Sec.  1.958-1(d)(1). RPII is generally 
defined as premium and investment income attributable to an annuity, 
insurance, or reinsurance policy that directly or indirectly provides 
coverage to a related insured. Proposed Sec.  1.953-3(b)(1)(i). The new 
definition of RPII is modeled on the 1991 proposed regulations but has 
been modified to account for the aggregate treatment of partnerships 
and the Insurance Active Financing Exception. Section 1.953-3(b)(1) of 
the 1991 proposed regulations is withdrawn.
    A related insured is defined to include a RPII U.S. shareholder or 
a person related to a RPII U.S. shareholder. Proposed Sec.  1.953-
3(b)(1)(ii)(A) and (B). In addition, if a related insured indirectly 
owns stock in a RPII CFC through a partnership, the partnership is 
treated as a related insured. Proposed Sec.  1.953-3(b)(1)(ii)(C). This 
rule applies to foreign and domestic partnerships (other than publicly 
traded partnerships) and to S corporations.
    Proposed Sec.  1.953-3(b)(1)(ii)(D) also provides that a person 
(other than a publicly traded corporation or partnership) is treated as 
a related insured if it is more than 50 percent owned (directly, 
indirectly, or constructively) by RPII U.S. shareholders. This rule is 
intended to prevent the avoidance of RPII when the insured is held by 
multiple RPII U.S. shareholders (or their affiliates) and is issued 
pursuant to the authority granted in section 953(c)(8)(A). The Treasury 
Department and the IRS request comments on whether the final 
regulations should include a rule under which a U.S. person that holds 
an option to acquire stock (or another non-stock interest) in a RPII 
CFC also should be treated as a related insured.
    The term ``related insured'' describes those persons who, if 
insured, would cause a RPII CFC's income to be characterized as RPII. A 
person who is not actually insured by a RPII CFC can meet the 
definition of a related insured for purposes of the proposed 
regulations (though a RPII CFC's income will not be characterized as 
RPII unless it is attributable to a policy that provides coverage to a 
related insured). No inference is intended concerning the standard for 
determining whether a person is characterized as being insured for 
other tax purposes.
    When a partnership is insured by a RPII CFC, the amount of RPII is 
determined based on the portion of the premium that is allocated to 
related insureds (other than partnerships or S corporations). Proposed 
Sec.  1.953-3(b)(1)(iii). In the case of tiered partnerships, the 
proposed regulations take into account the portion of the premium that 
is allocated to a partner who indirectly owns a partnership through one 
or more upper-tier partnerships. The proposed regulations provide that 
the premium allocated to the relevant partner is determined based on 
the partnership agreement and section 704(b). Proposed Sec.  1.953-
3(b)(1)(iii)(C)(1). The Treasury Department and the IRS are also 
considering whether, solely for purposes of determining the amount of 
RPII, another method of allocating the premium payments should be 
required under the authority provided in section 953(c)(8). One 
potential method includes allocating the premium payments in proportion 
to each partner's nonseparately stated share of partnership income or 
loss. Comments are requested on whether this or another alternative 
would be more appropriate.
    The Treasury Department and the IRS request comments on the 
appropriate application of aggregate principles to RPII. The Treasury 
Department and the IRS also are considering revising forms and 
instructions to facilitate information sharing and reporting between 
RPII U.S. shareholders, RPII CFCs, and partnerships and request 
comments in this regard.
2. Cross-Insurance Rule
    The Treasury Department and IRS are aware of abusive marketed 
offshore captive insurance arrangements that, notwithstanding the 
directive in section 953(c)(8)(A) and legislative history described in 
part IV.C of the Background section of this preamble and the 1991 
proposed regulations, attempt to avoid the RPII rules through the use 
of cross-insurance. Consistent with the Congressional directive, the 
proposed regulations contain a special rule to address cross-insurance 
arrangements, which replaces the cross-insurance rule contained in the 
1991 proposed regulations. Proposed Sec.  1.953-3(b)(5) provides that 
insurance income is treated as RPII if it is attributable to an 
arrangement in which a RPII CFC insures a person that is not a related 
insured and, as part of the same arrangement, another person insures a 
related insured of the RPII CFC. This rule applies to direct or 
indirect arrangements involving two or more insurance companies, and 
also covers other arrangements with a similar degree of cooperative 
risk sharing and applies regardless of whether the shareholders of each 
RPII CFC are engaged in a similar line of business. Section 1.953-
3(b)(5) of the 1991 proposed regulations is withdrawn.
    The Treasury Department and the IRS request comments with respect 
to other parts of the 1991 proposed regulations relating to RPII, 
including whether other parts should be reproposed, such as the 
exception for indirect ownership through publicly traded corporations 
under Sec.  1.953-3(b)(2)(iii) of the 1991 proposed regulations.

[[Page 3902]]

III. Net Investment Income Tax

    As discussed in part V of the Background section of this preamble, 
a domestic partnership or S corporation that directly or indirectly 
(through one or more foreign entities) owns a CFC or QEF may make an 
election under Sec.  1.1411-10(g) with respect to the CFC or QEF, and 
certain persons that own a CFC or QEF indirectly through a domestic 
partnership or S corporation may also make such an election, but only 
if the domestic partnership or S corporation does not make the 
election.
    Consistent with the transition to aggregate treatment and 
provisions in this rulemaking requiring QEF elections to be made (and 
QEF inclusions to arise) at the partner or S corporation shareholder 
level, the Treasury Department and the IRS have determined that 
elections under Sec.  1.1411-10(g) should no longer be permitted to be 
made by a domestic pass-through entity, but instead should be made only 
by an individual, estate, or trust that holds the CFC or QEF indirectly 
through the domestic pass-through entity. This rule permits the 
election to be made solely by the person whose tax liability is 
directly affected by the election. Accordingly, proposed Sec.  1.1411-
10(g)(3)(i) generally requires the election to be made by an 
individual, estate, or trust that indirectly holds the relevant CFC or 
QEF indirectly through a partnership or S corporation. However, for 
taxable years that an S corporation elects to be treated as an entity 
under proposed Sec.  1.958-1(e), the S corporation may make the 
election under Sec.  1.1411-10(g) with respect to CFCs it owns, 
directly or indirectly; if the S corporation does not make the election 
under Sec.  1.1411-10(g), its shareholders that are individuals, 
estates, or trusts may make it instead. Proposed Sec.  1.1411-
10(g)(3)(ii).
    The proposed regulations also remove Sec.  1.1411-10(g)(2)(iii), 
which provided rules applicable when a partnership terminated under 
section 708(b)(1)(B), because section 708(b)(1)(B) was repealed as part 
of the TCJA.
    Finally, the Treasury Department and the IRS are considering 
providing additional guidance (perhaps in the finalization of these 
proposed regulations) under section 1411 on the calculation of net gain 
for indirect shareholders when, for example, PFIC stock is sold by a 
foreign partnership through which the indirect shareholder owns the 
PFIC stock in a year after the indirect shareholder includes MTM gain. 
Compare section 1296(b)(1)(A) (providing an increase to the basis of 
PFIC stock held by a direct shareholder), with section 1296(b)(2)(A) 
and proposed Sec.  1.1296-1(d)(2)(i) (providing, for purposes of 
chapter 1 of the Code, an increase to the basis of PFIC stock 
indirectly held). In light of this difference in wording, and the 
placement of section 1411 in chapter 2A of the Code, the question 
arises whether net gain under section 1411 could be overstated. But see 
section 1411(c)(1)(A)(iii) and Sec.  1.1411-4(a)(1)(iii) (providing 
that net investment income includes net gain attributable to the 
disposition of property but only ``to the extent taken into account in 
computing taxable income.'') Comments are requested on this issue.

IV. Applicability Dates

A. In General

    The regulations under sections 964, 1291, 1293, 1295, 1296, 1298, 
and 1411 and Sec.  1.958-1(d) are proposed to apply to taxable years 
beginning on or after the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register.

B. Entity Treatment of Certain Domestic Partnerships and S Corporations

    With respect to the rules relating to domestic partnerships and S 
corporations that applied the hybrid approach to determining section 
951A inclusions contained in previously proposed Sec.  1.951A-5 (83 FR 
51072, 51101-51104), proposed Sec.  1.951A-1(e)(2) is proposed to apply 
to taxable years of foreign corporations ending before June 22, 2019, 
and to taxable years of U.S. shareholders in which or with which such 
taxable years end. Taxpayers may continue to rely on Notice 2019-46 
until these regulations are finalized.

C. Elective Entity Treatment for Certain S Corporations

    With respect to the rules relating to S corporations with AE&P, 
proposed Sec.  1.958-1(e) is proposed to apply to taxable years of S 
corporations ending on after September 1, 2020. However, taxpayers may 
rely on proposed Sec.  1.958-1(e) for taxable years of S corporations 
ending on or after June 22, 2019, and ending before September 1, 2020, 
provided that the S corporation and its shareholders that are U.S. 
shareholders consistently apply those rules with respect to all CFCs 
whose stock the S corporation owns with the meaning of section 958(a).

D. RPII Provisions

    The general RPII rules in proposed Sec.  1.953-3(b)(1) apply to 
taxable years of foreign corporations beginning on or after the date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register, and to taxable years of United 
States persons in which or with which such taxable years of foreign 
corporations end.
    The cross-insurance rule in proposed Sec.  1.953-3(b)(5) applies to 
taxable years of foreign corporations ending on or after January 24, 
2022, and to taxable years of United States persons in which or with 
which such taxable years of foreign corporations end. As noted in part 
IV.C of the Background section of this preamble, section 953(c)(8)(A) 
and the legislative history refer to cross insurance in offshore 
captive insurance arrangements as avoidance transactions, and the 
legislative history states that deferral is not intended for such 
cases. The applicability date of the final regulations is not intended 
to address the effect of the statute and legislative history on 
taxpayers who participated in cross-insurance arrangements in years 
ending before January 24, 2022.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    These regulations are not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Treasury Department and the Office of Management 
and Budget (``OMB'') regarding review of tax regulations.

II. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA'') 
generally requires that a federal agency obtain the approval of the OMB 
before collecting information from the public, whether such collection 
of information is mandatory, voluntary, or required to obtain or retain 
a benefit.
    The collections of information included in these proposed 
regulations are in proposed Sec.  1.951A-1(e)(2)(iii); proposed Sec.  
1.958-1(e)(1)(v) and (e)(2); proposed Sec.  1.964-1(c)(3)(ii) and 
(iii); proposed Sec.  1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A); proposed 
Sec.  1.1296-1(h)(1)(i) introductory text and (h)(1)(i)(B); and 
proposed Sec.  1.1298-1(b)(1) and (2). The information in the 
collections of information provided will generally be used by the IRS 
for tax compliance purposes or by taxpayers to facilitate proper 
reporting and compliance.

[[Page 3903]]

A. Collections of Information Under Existing Tax Forms

1. Collections of Information in Proposed Sec.  1.951A-1
    The collections of information in proposed Sec.  1.951A-
1(e)(2)(iii) are required to be provided by domestic partnerships and S 
corporations that elect to apply the rules in proposed Sec.  1.951A-5, 
as contained in the 2018 proposed regulations (83 FR 51072, 51101-
51104), for taxable years ending before June 22, 2019. These 
collections of information are satisfied by the domestic partnership or 
S corporation attaching a statement to its return. In certain 
instances, the domestic partnership or S corporation must also file 
Form 8992, ``U.S. Shareholder Calculation of Global Intangible Low-
Taxed Income (GILTI),'' with its return and separately state each 
partner's or shareholder's share of any distributions of E&P received 
by the domestic partnership or S corporation that relate to the GILTI 
inclusion amount reflected on its Schedules K-1, ``Partner's Share of 
Income, Deductions, Credits, etc.'' or Schedules K-1, ``Shareholder's 
Share of Income, Deductions, Credits, etc.,'' as applicable.
    For purposes of the PRA, the reporting burden associated with the 
collections of information in proposed Sec.  1.951A-1(e)(2)(iii) will 
be reflected in the Paperwork Reduction Act Submissions associated with 
Forms 1065 and 1120-S (OMB control number 1545-0123).
2. Collections of Information in Proposed Sec.  1.958-1
    The collection of information in proposed Sec.  1.958-1(e)(2) is a 
statement attached to Form 1120-S that identifies that the S 
corporation and its shareholders (where applicable) are electing for 
the S corporation to be treated as an entity for purposes of 
determining who is subject to income inclusions under sections 951 and 
951A for the first taxable year ending on or after September 1, 2020, 
states the amount of the S corporation's AE&P, and is signed (where 
applicable) by a person authorized to sign the S corporation's Form 
1120-S. A similar collection of information is required for taxpayers 
(certain S corporations and their shareholders) that elect for the S 
corporation to be treated as an entity for purposes of sections 951 and 
951A for taxable years ending before September 1, 2020, and after June 
21, 2019.
    For purposes of the PRA, the reporting burden associated with the 
collection of information in proposed Sec.  1.958-1(e)(2) will be 
reflected in the Paperwork Reduction Act Submissions associated with 
Form 1120-S (OMB control number 1545-0123). Additionally, where an S 
corporation and its shareholders elect for the S corporation to be 
treated as an entity for taxable years ending before September 1, 2020, 
and after June 21, 2019, the reporting burden associated with the 
collection of information in proposed Sec.  1.958-1(e)(2) will be 
reflected in the Paperwork Reduction Act Submissions associated with 
Form 1120-S (OMB control number 1545-0123), the Form 1040 series (OMB 
control number 1545-0074), and the Form 1041 series (OMB control number 
1545-0092).
3. Collections of Information in Sec.  1.964-1 and Proposed Sec.  
1.964-1
    The collection of information in proposed Sec.  1.964-1(c)(3)(ii) 
applies to taxpayers that are controlling domestic shareholders of 
foreign corporations (as defined in Sec.  1.964-1(c)(5)) and that make 
certain elections with respect to, or adopt or change methods of 
accounting or taxable years for, the foreign corporations. This 
collection of information is satisfied by the controlling domestic 
shareholder filing a statement containing certain prescribed 
information with its own tax return (or information return, if 
applicable) for its taxable year in which or within which the affected 
taxable year of the foreign corporation ends. The collection of 
information in proposed Sec.  1.964-1(c)(3)(ii) applies to U.S. 
shareholder partners (and not to U.S. shareholder partnerships) as a 
result of proposed Sec.  1.958-1(d)(1).
    The collection of information in proposed Sec.  1.964-1(c)(3)(iii) 
requires controlling domestic shareholders of foreign corporations to 
notify certain U.S. persons known to them of actions taken with respect 
to the foreign corporation, such as certain tax elections and adoptions 
of or changes to the foreign corporation's accounting methods or tax 
years. Under proposed Sec.  1.964-1(c)(3)(iii)(A), this collection of 
information is satisfied by the controlling domestic shareholder 
providing notice to prescribed U.S. persons known to the controlling 
domestic shareholder setting forth the name, country of organization, 
and U.S. employer identification number (if applicable) of the foreign 
corporation; providing the names, addresses, and stock interests of the 
controlling domestic shareholders of the foreign corporation; 
describing the nature of the action taken on behalf of the foreign 
corporation and the taxable year for which the action was taken; and 
identifying a designated shareholder that retains a jointly executed 
consent confirming that such action has been approved by all of the 
controlling domestic shareholders and containing the signature of a 
principal officer of each such shareholder (or its common parent). 
Proposed Sec.  1.964-1(c)(3)(iii)(B) provides that a controlling 
domestic shareholder will be deemed to satisfy the general notice 
requirement with respect to U.S. persons known to the controlling 
domestic shareholder that own stock in the foreign corporation through 
a domestic partnership by providing the notice containing the same 
information to the partnership instead of to each U.S. person.
    For purposes of the PRA, the reporting burden associated with the 
collections of information in proposed Sec.  1.964-1(c)(3)(ii) and 
(iii) will be reflected in the Paperwork Reduction Act Submissions 
associated with the Forms for persons which can be considered 
controlling domestic shareholders under the proposed regulations, 
including individuals and certain domestic trusts, domestic estates, 
domestic corporations, certain tax-exempt entities. Thus, the reporting 
burden associated with these collections of information will be 
reflected in the Paperwork Reduction Act Submissions associated with 
the Form 990 series (OMB control number 1545-0047), the Form 1040 
series (OMB control number 1545-0074), the Form 1041 series (OMB 
control number 1545-0092), and the Form 1120 series (OMB control number 
1545-0123).
4. Collections of Information in Proposed Sec.  1.1295-1
    The collections of information in proposed Sec.  1.1295-
1(d)(2)(i)(A) and (d)(2)(ii)(A) apply to partners in partnerships and S 
corporation shareholders that make QEF elections with respect to a PFIC 
held through a partnership or S corporation. The collections of 
information in these sections are satisfied, in part, by the partners 
and S corporation shareholders filing Form 8621 to make the QEF 
election. For purposes of the PRA, the reporting burden associated with 
the collection of information in the Form 8621 will be reflected in the 
Paperwork Reduction Act Submissions associated with Form 8621 (OMB 
control number 1545-1002).
5. Collection of Information in Proposed Sec.  1.1296-1
    The collections of information in proposed Sec.  1.1296-1(h)(1)(i) 
apply to partners in partnerships and S corporation shareholders that 
make MTM elections with respect to PFICs

[[Page 3904]]

held through a partnership or S corporation. These collections of 
information are satisfied, in part, by the partners and S corporation 
shareholders filing Form 8621 to make the MTM election. For purposes of 
the PRA, the reporting burden associated with the collections of 
information in the Form 8621 will be reflected in the Paperwork 
Reduction Act Submissions associated with Form 8621 (OMB control number 
1545-1002).
6. Collections of Information in Proposed Sec.  1.1298-1
    The collections of information in proposed Sec.  1.1298-1(b)(1) 
apply to partners in partnerships and S corporation shareholders that 
own PFICs indirectly through partnerships and S corporations with 
respect to which they are required to file an annual report in their 
capacity as PFIC shareholders, as defined in proposed Sec.  1.1291-
1(b)(7). The collections of information in proposed Sec.  1.1298-
1(b)(2) apply to certain beneficiaries of domestic estates and domestic 
nongrantor trusts that own PFICs indirectly through the domestic estate 
or domestic nongrantor trust. These collections of information are 
satisfied by annually filing Form 8621. For purposes of the PRA, the 
reporting burden associated with the collections of information in the 
Form 8621 will be reflected in the Paperwork Reduction Act Submissions 
associated with Form 8621 (OMB control number 1545-1002).
7. Estimated Number of Respondents
    The following table displays the number of respondents estimated to 
be required to satisfy the collections of information described in this 
part II.A of the Special Analysis. The ranges in the following table 
may be overstated in some cases for various reasons, including 
overcounting domestic partnerships or S corporations that are 
themselves partners in domestic partnerships and overestimating the 
number of taxpayers who will make an election or take a relevant 
action.

                                               Tax Forms Impacted
----------------------------------------------------------------------------------------------------------------
                                             Number of respondents       Forms to which the information may be
        Collection of information                 (estimated)                           attached
----------------------------------------------------------------------------------------------------------------
Proposed Sec.   1.951A-1(e) (2)(iii):     0-7,000....................  Form 1065.
 Election for domestic partnerships to
 apply the hybrid approach in proposed
 Sec.   1.951A-5 of the 2018 proposed
 regulations.
Proposed Sec.   1.951A-1(e)(2)(iii):      0-4,000....................  Form 1120-S.
 Election for S corporations to apply
 the hybrid approach in proposed Sec.
 1.951A-5 of the 2018 proposed
 regulations.
Proposed Sec.   1.958-1(e)(2): Election   2,300-4,300................  Form 1120-S.
 for S corporations with AE&P to apply                                 Form 1040 series.
 entity treatment for purposes of                                      Form 1041 series.
 sections 951 and 951A.
Proposed Sec.   1.964-1(c)(3)(ii) and     6,600-7,000................  Form 990 series.
 (iii): Statement attached to tax return                               Form 1040 series.
 of controlling domestic shareholders of                               Form 1041 series.
 certain foreign corporations and                                      Form 1120 series.
 notification to certain other U.S.
 persons.
Proposed Sec.   1.1295-1(d)(2)(i)(A):     1,200,000-1,400,000........  Form 8621.
 QEF election made by partner that
 indirectly owns stock of a PFIC through
 a partnership.
Proposed Sec.   1.1295-1(d)(2)(ii)(A):    2,000......................  Form 8621.
 QEF election made by shareholder of an
 S corporation that indirectly owns
 stock of a PFIC through the S
 corporation.
Proposed Sec.   1.1296-1(h)(1)(i): MTM    75,000-200,000.............  Form 8621.
 election made by partner that
 indirectly owns stock of a PFIC through
 a partnership.
Proposed Sec.   1.1296-1(h)(1)(i): MTM    200-300....................  Form 8621.
 election made by shareholder of an S
 corporation that indirectly owns stock
 of a PFIC through the S corporation.
Proposed Sec.   1.1298-1(b)(1): Annual    1,250,000-1,500,000........  Form 8621.
 report for partners that indirectly own
 stock of a PFIC through a partnership.
Proposed Sec.   1.1298-1(b)(1): Annual    2,300-2,500................  Form 8621.
 report for shareholders of S
 corporations that indirectly own stock
 of a PFIC through the S corporation.
Proposed Sec.   1.1298-1(b)(2): Annual    5,000......................  Form 8621.
 report for certain beneficiaries of
 domestic estates or domestic grantor
 trusts that indirectly own stock of a
 PFIC through the estate or grantor
 trust.
----------------------------------------------------------------------------------------------------------------
Source: Research, Applied Analytics and Statistics division (RAAS) (IRS), Compliance Data Warehouse (CDW) (IRS).

8. Status of PRA Submissions
    The current status of the PRA submissions related to the tax forms 
on which reporting under these regulations will be required is 
summarized in the following table. The burdens associated with the 
information collections in the forms are included in aggregated burden 
estimates for the OMB control numbers 1545-0047 (which represents a 
total estimated burden time for all forms and schedules for tax-exempt 
entities of 50.5 million hours and total estimated monetized costs of 
$3.59 billion ($2018)), 1545-0074 (which represents a total estimated 
burden time for all forms and schedules for individuals of 1.784 
billion hours and total estimated monetized costs of $31.764 billion 
($2017)), 1545-0092 (which represents a total estimated burden time for 
all forms and schedules for trusts and estates of 307.8 million hours 
and total estimated monetized costs of $9.95 billion ($2016)), and 
1545-0123 (which represents a total estimated burden time for all forms 
and schedules for corporations of 3.157 billion hours and total 
estimated monetized costs of $58.148 billion ($2017)). The burden 
estimates provided in the OMB control numbers in the following table 
are aggregate amounts that relate to the entire package of forms 
associated with the OMB control number and will in the future include, 
but not isolate, the estimated burden of the tax forms that will be 
revised as a result of the information collections in these proposed 
regulations. These numbers are therefore unrelated to the future 
calculations needed to assess the burden imposed by these proposed 
regulations. To guard against over-counting the burden that 
international tax provisions imposed prior to the Act, the Treasury 
Department and the IRS urge readers to recognize that these burden 
estimates have also been cited by regulations (such as the foreign tax 
credit regulations, 84 FR 69022) that rely on the applicable OMB 
control numbers in order to collect information from the applicable 
types of filers.

[[Page 3905]]

    In 2018, the IRS released and invited comment on drafts of Forms 
990-PF (Return of Private Foundation or Section 4947(a)(1) Trust 
Treated as Private Foundation), 990-T (Exempt Organization Business 
Income Tax Return), 1040 (U.S. Individual Income Tax Return), (U.S. 
Income Tax Return for Estates and Trusts), 1065 (U.S. Return of 
Partnership Income), 1120 (U.S. Corporation Income Tax Return), and 
8621 (Return by a Shareholder of a Passive Foreign Investment Company 
or Qualified Electing Fund). The IRS received comments only regarding 
Forms 1040, 1065, and 1120 during the comment period. After reviewing 
all such comments, the IRS made the forms available on December 21, 
2018, for use by the public.
    No burden estimates specific to the forms affected by the proposed 
regulations are currently available. The Treasury Department and the 
IRS have not estimated the burden, including that of any new 
information collections, related to the requirements under the proposed 
regulations. The Treasury Department and the IRS request comments on 
all aspects of information collection burdens related to the proposed 
regulations, including estimates for how much time it would take to 
comply with the paperwork burdens for each relevant form and ways for 
the IRS to minimize the paperwork burden. In addition, drafts of IRS 
forms are posted for public review at https://apps.irs.gov/app/picklist/list/draftTaxForms.htm. Comments on these forms can be 
submitted at https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications. These forms will not be finalized until after they have 
been approved by OMB under the PRA.

B. Collections of Information for Which New OMB Control Numbers Are 
Being Requested

1. Collection of Information in Proposed Sec.  1.958-1
    The collection of information in proposed Sec.  1.958-1(e)(1)(v) is 
required for certain S corporations to make valid elections under 
proposed Sec.  1.958-1(e)(1)(i) to apply entity treatment for purposes 
of determining income inclusions under sections 951 and 951A. This 
collection of information is satisfied by the S corporation maintaining 
sufficient records to support the determination of its AE&P amount.
    Estimated annual reporting burden: 213.
    Estimated total annual monetized cost burden: $20,188.
    Estimated average annual burden hours per respondent: 0.5.
    Estimated number of respondents: 425.
    Estimated annual frequency of responses: Once.
2. Collections of Information in Proposed Sec.  1.1295-1
    Part of the collection of information in proposed Sec.  1.1295-
1(d)(2)(i)(A) is for a partner to notify the partnership that the 
partner has made a QEF election with respect to a PFIC it owns 
indirectly through the partnership. This collection of information is 
satisfied by the partner notifying the partnership of the election no 
later than 30 days after filing the return with which the election is 
made. The partner may notify the partnership in any reasonable manner.
    Estimated annual reporting burden: 650,000.
    Estimated total annual monetized cost burden: $61,750,000.
    Estimated average annual burden hours per respondent: 0.5.
    Estimated number of respondents: 1,300,000.
    Estimated annual frequency of responses: One-time election.
    Part of the collection of information in proposed Sec.  1.1295-
1(d)(2)(ii)(A) is for an S corporation shareholder to notify the S 
corporation that the shareholder has made a QEF election with respect 
to a PFIC it owns indirectly through the S corporation. This collection 
of information is satisfied by the shareholder notifying the S 
corporation of the election no later than 30 days after filing the 
return with which the election is made. The shareholder may notify the 
S corporation in any reasonable manner.
    Estimated annual reporting burden: 1,000.
    Estimated total annual monetized cost burden: $95,000.
    Estimated average annual burden hours per respondent: 0.5.
    Estimated number of respondents: 2,000.
    Estimated annual frequency of responses: One-time election.
3. Collection of Information in Proposed Sec.  1.1296-1
    The collection of information in proposed Sec.  1.1296-
1(h)(1)(i)(B) is for a partner or an S corporation shareholder to 
notify the partnership or S corporation, respectively, that the partner 
or shareholder has made an MTM election with respect to a PFIC it owns 
indirectly through the partnership or S corporation. This collection of 
information is satisfied by the partner or shareholder notifying the 
partnership or S corporation of the election no later than 30 days 
after filing the return with which the election is made. The partner or 
shareholder may notify the partnership or S corporation in any 
reasonable manner.
    Estimated annual reporting burden: 35,500.
    Estimated total annual monetized cost burden: $3,372,500.
    Estimated average annual burden hours per respondent: 0.5.
    Estimated number of respondents: 71,000.
    Estimated annual frequency of responses: One-time election.
4. Submission to OMB and Request for Comments
    The collections of information contained in proposed Sec. Sec.  
1.958-1(e)(1)(v); 1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A); and 1.1296-
1(h)(1)(i)(B) are either general recordkeeping or notice requirements 
and cannot be associated with existing OMB control numbers. These 
collections of information will be submitted to the Office of 
Management and Budget for review and, if approved, assigned new OMB 
control numbers in accordance with the PRA. Comments on the collections 
of information should be sent to the Office of Management and Budget, 
Attn: Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Washington, DC 20503, with copies 
to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of 
information should be received by March 28, 2022. Comments are 
specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the duties of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchases of services to provide information for the 
collections discussed in part II.B of this Special Analyses.

[[Page 3906]]

III. Regulatory Flexibility Act

    Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it 
is hereby certified that the proposed regulations would 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 
(``small entities'').
    The Small Business Administration establishes small business size 
standards (13 CFR part 121) by annual receipts or number of employees. 
There are several industries that may be identified as small even 
through their annual receipts are above $25 million or because of the 
number of employees. The Treasury Department and the IRS do not have 
data indicating the number of small entities that will be significantly 
impacted by the proposed regulations. Nevertheless, regardless of the 
number of small entities potentially impacted, the Treasury Department 
and the IRS have concluded that the proposed regulations will not have 
a significant economic impact on small entities.
    First, the proposed regulations provide guidance with respect to 
domestic partnerships under the PFIC regime, which generally affects 
U.S. taxpayers that have ownership interests in certain foreign 
corporations that are not CFCs. To the extent that a foreign entity 
might be considered a small entity for purposes of the Regulatory 
Flexibility Act (because it has a place of business in the United 
States and makes a significant contribution to the U.S. economy, for 
example), because the proposed regulations would not affect foreign 
partnerships, foreign partners of the affected domestic partnerships, 
or the PFIC itself, there would be no economic impact on those foreign 
entities. Therefore, a small entity generally would not be affected by 
the proposed regulations unless it is a U.S. taxpayer that has an 
ownership interest in a foreign corporation. For purposes of the 
Regulatory Flexibility Act, natural persons are not considered small 
entities.
    Although data on U.S. businesses that invest in a PFIC is limited, 
data available to the IRS shows that individuals (Form 1040 filers) 
make up approximately 70 percent of those who report PFIC income while 
U.S. businesses of all sizes make up approximately 20 percent of Form 
8621 filers. To estimate the magnitude of the taxes currently collected 
as a result of U.S. businesses investing in PFICs, the Treasury 
Department and the IRS calculated the ratio of PFIC regime tax to 
(gross) total income for 2013 through 2018 for corporations that filed 
Form 1120 (``C corporations'') with a Form 8621 attached. Total income 
was determined by matching each C corporation filing Form 8621 to its 
Form 1120. Ordinary QEF income, QEF capital gains, and MTM income were 
assumed to be taxed at 35 percent (21 percent for 2018), and the 
section 1291 tax and interest charge tax were included as reported. 
Only those corporations where a match was found and that had positive 
total income were included in the analysis. For the approximately 150 
to 300 C corporations for which a match was available in a given year, 
the average annual ratio of the calculated tax to total income was 
never greater than 0.00035 percent. For the approximately 60 to 200 C 
corporations per year with $25 million or less for which a match was 
available, the average annual ratio was never greater than 1.068 
percent.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        2013 ($ millions)  2014 ($ millions)  2015 ($ millions)  2016 ($ millions)  2017 ($ millions)  2018 ($ millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   All C corporations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax...................................                  5                 12                 14                  8                 22                 42
Total Income..........................          4,204,795         10,154,520         19,935,845         20,076,876         21,625,159         13,317,244
Tax to Total Income...................             0.000%             0.000%             0.000%             0.000%             0.000%             0.000%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 C corporations with total income of $25 million or less
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax...................................                (*)                (*)                  4                  4                  5                  3
Total Income..........................                463                563                627                573                460                741
Tax to Total Income...................             0.060%             0.014%             0.576%             0.689%             1.068%             0.400%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: RAAS, CDW. * indicates less than $1 million.

    Thus, even if the economic impact of the proposed regulations is 
interpreted broadly to include the tax liability due under the PFIC 
regime, which small entities would be required to pay even if the 
proposed regulations were not issued, the tax-related economic impact 
should not be regarded as significant under the Regulatory Flexibility 
Act.
    A portion of the economic impact of the proposed regulations 
derives from the administration of the new rules and the collection of 
information requirements imposed by the PFIC-related provisions in 
proposed Sec. Sec.  1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A), 1.1296-
1(h)(1)(i), and 1.1298-1(b)(1) and (2). For the collections of 
information in proposed Sec. Sec.  1.1295-1(d)(2)(i)(A) and 
(d)(2)(ii)(A) and 1.1296-1(h)(1)(i), the Treasury Department and the 
IRS have determined that the average burden is approximately half an 
hour per response. The IRS's Research, Applied Analytics, and 
Statistics division estimates that the appropriate wage rate for this 
set of taxpayers is $95 per hour. Thus, the annual burden per taxpayer 
from the collection of information requirement for each of these 
provisions is approximately $48. Additionally, these requirements apply 
only if a taxpayer chooses to make an election. For the collections of 
information in proposed Sec.  1.1298-1(b)(1) and (2), the Treasury 
Department and the IRS have determined that the average burden is 
approximately 49 hours per response. The IRS's Research, Applied 
Analytics, and Statistics division estimates that the appropriate wage 
rate for this set of taxpayers is $95 per hour. Thus, the annual burden 
per taxpayer from the collection of information requirement in this 
provision is approximately $4,655. This requirement applies to 
taxpayers required to file Form 8621 with respect to a PFIC. In each 
case, the compliance burden associated with the PFIC-related provisions 
in the proposed regulations is generally shifted from the entity level 
to the owner level. For example, under proposed Sec. Sec.  1.1295-
1(d)(2)(i)(A) and 1.1298-1(b)(1), a domestic partnership no longer 
makes a QEF election with respect to, and no longer files Form

[[Page 3907]]

8621 for, PFICs it owns; rather, the election and associated Form 8621 
will be made and filed, respectively, by the partners. While this shift 
could result in some duplication of the overall compliance burden 
associated with the PFIC-related provisions in the proposed 
regulations, the Treasury Department and the IRS do not believe this 
shift should have a significant economic impact on taxpayers.
    Additionally, the proposed regulations provide guidance with 
respect to several statutory provisions within subpart F, which 
generally affect U.S. shareholders of CFCs. To estimate the magnitude 
of the tax impact of these provisions on small entities, the Treasury 
Department and the IRS examined the gross receipts of all taxpayers 
that e-filed Forms 5471 as a Category 4 or 5 filer for 2015 and 2016, 
which amounted to approximately 25,000 to 35,000 taxpayers in each 
year. The Treasury Department and the IRS then determined the tax 
revenue generated from the approximately 25,000 to 35,000 taxpayers' 
section 951A inclusions \4\ estimated by the Joint Committee on 
Taxation for businesses of all sizes is less than 0.3 percent of gross 
receipts, as shown in the table that follows. Based on data for 2015 
and 2016, total gross receipts for all businesses with gross receipts 
under $25 million is $60 billion while those over $25 million is $49.1 
trillion. Given that tax on section 951A inclusions is generally 
correlated with gross receipts, this results in businesses with less 
than $25 million in gross receipts accounting for approximately 0.01 
percent of the tax revenue. Additionally, although data are generally 
not readily available to determine the sectoral breakdown of these 
entities, the number of domestic partnerships and S corporations 
subject to these provisions under the proposed regulations should make 
up only a portion of the totals. For example, the Treasury Department 
and the IRS estimate that there were approximately 7,000 domestic 
partnerships that e-filed at least one Form 5471 as a Category 4 or 5 
filer in each of 2015 and 2016, amounting to 28 percent of the low-end 
estimate of all taxpayers filing Form 5471 as a Category 4 or 5 filer 
and 20 percent of the high-end estimate. Based on this analysis, the 
proposed regulations do not impose a significant economic impact on 
smaller businesses, in particular domestic partnerships and S 
corporations.
---------------------------------------------------------------------------

    \4\ The Treasury Department and the IRS determined that using 
section 951A inclusions, rather than section 951 inclusions, would 
serve as a better indication of the potential tax impact of the 
proposed regulations on small entities that own CFCs because the 
base upon which a U.S. shareholder's section 951A inclusion is 
computed (a CFC's gross income--with certain exceptions--less 
allocable deductions) is generally broader than the base upon which 
its section 951 inclusion is computed (a CFC's income from specified 
transactions).

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                         2017                2018                2019                2020                2021                2022                2023                2024                2025                2026
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation       7.7 billion.......  12.5 billion......  9.6 billion.......  9.5 billion.......  9.3 billion.......  9.0 billion.......  9.2 billion.......  9.3 billion.......  15.1 billion......  21.2 billion.
 (JCT) tax revenue.
Total gross receipts............  30727 billion.....  53870 billion.....  566676 billion....  59644 billion.....  62684 billion.....  65865 billion.....  69201 billion.....  72710 billion.....  76348 billion.....  80094 billion.
Percent.........................  0.03..............  0.02..............  0.02..............  0.02..............  0.01..............  0.01..............  0.01..............  0.01..............  0.02..............  0.03.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C and S corporations and partnerships); Conference Report, at 689.

    Thus, even if the economic impact of the proposed regulations is 
interpreted broadly to include the tax liability due under subpart F, 
which small entities would be required to pay even if the proposed 
regulations were not issued, the tax-related economic impact should not 
be regarded as significant under the Regulatory Flexibility Act.
    A portion of the economic impact of the proposed regulations 
derives from the collection of information requirements imposed by the 
provisions related to CFCs and other types of foreign corporations in 
proposed Sec.  1.951A-1(e)(2)(iii), proposed Sec.  1.958-1(e)(1)(v) and 
(e)(2), and proposed Sec.  1.964-1(c)(3)(ii) and (iii). The Treasury 
Department and the IRS have determined that the average burden for each 
of these provisions is approximately half an hour per response. The 
IRS's Research, Applied Analytics, and Statistics division estimates 
that the appropriate wage rate for this set of taxpayers is $95 per 
hour. Thus, the annual burden per taxpayer from the collection of 
information requirement for each of these provisions is approximately 
$48. These requirements apply only if a taxpayer chooses to make an 
election with respect to the CFC or other foreign corporation. In the 
case of proposed Sec.  1.964-1(c)(3)(ii) and (iii), the compliance 
burden is generally shifted from the U.S. shareholder partnership level 
to its U.S. shareholder partners. While this shift could result in some 
duplication of the overall compliance burden associated with these 
provisions, the Treasury Department and the IRS do not believe this 
shift should result in a significant economic impact on taxpayers.
    Accordingly, it is hereby certified that the proposed regulations 
would not have a significant economic impact on a substantial number of 
small entities.

IV. Section 7805(f)

    Pursuant to section 7805(f), the proposed regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small businesses. The 
Treasury Department and the IRS also request comments from the public 
on the analysis in part III of the Special Analyses.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
requires that agencies assess anticipated costs and benefits and take 
certain other actions before issuing a final rule that includes any 
Federal mandate that may result in expenditures in any one year by a 
state, local, or tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. This rule does not include any Federal mandate that may 
result in expenditures by state, local, or tribal governments, or by 
the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on state and local 
governments, and is not required by statute, or preempts state law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. These proposed regulations do not 
have federalism implications and do not impose substantial direct 
compliance

[[Page 3908]]

costs on state and local governments or preempt state law within the 
meaning of the Executive order.

Comments and Requests for Public Hearing

    Before the proposed amendments are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES section. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations. See also parts I.B.1 and I.C.1 of the 
Explanation of Provisions requesting comments related to the 
possibility of delegating authority to domestic partnerships and S 
corporations to make QEF and MTM elections on behalf of their owners; 
part II.D of the Explanation of Provisions requesting comments on (i) 
whether a U.S. person holding an option to acquire stock (or other non-
stock interest) in a RPII CFC should be treated as a related insured, 
(ii) the allocation of premium payments made by a partnership, (iii) 
the general application of aggregate principles to RPII, (iv) necessary 
revisions to forms and instructions to facilitate information sharing 
and reporting for RPII purposes, and (v) other parts of the 1991 
proposed regulations relating to RPII, including whether other parts 
should be reproposed (such as the exception for indirect ownership 
through publicly traded corporations); and part III of the Explanation 
of Provisions requesting comments on the calculation of indirect 
shareholders' net gain for purposes of section 1411. Any electronic 
comments submitted, and to the extent practicable any paper comments 
submitted, will be made available at www.regulations.gov or upon 
request.
    A public hearing will be scheduled if requested in writing by any 
person who timely submits electronic or written comments. Requests for 
a public hearing are also encouraged to be made electronically. If a 
public hearing is scheduled, notice of the date and time for the public 
hearing will be published in the Federal Register. Announcement 2020-4, 
2020-17 IRB 1, provides that until further notice, public hearings 
conducted by the IRS will be held telephonically. Any telephonic 
hearing will be made accessible to people with disabilities.

Drafting Information

    The principal authors of these regulations are Edward Tracy, 
Raphael Cohen, and Josephine Firehock of the Office of Associate Chief 
Counsel (International), and Caroline E. Hay and Jennifer N. Keeney of 
the Office of Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the Treasury Department and 
the IRS participated in their development.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin or Cumulative Bulletin and are available from the 
Superintendent of Documents, U.S. Government Publishing Office, 
Washington, DC 20402, or by visiting the IRS website at www.irs.gov.

Partial Withdrawal of Proposed Regulations

    Under the authority of 26 U.S.C. 7805, proposed Sec.  1.953-3(b)(1) 
and (5) contained in the notice of proposed rulemaking that was 
published in the Federal Register on April 17, 1991 (56 FR 15540), is 
withdrawn.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1.The authority citation for part 1 is amended by:
0
1. Adding a sectional authority for Sec.  1.953-3 in numerical order;
0
2. Revising the sectional authorities for Sec. Sec.  1.1293-1, 1.1295-
1, and 1.1296-1;
0
3. Adding sectional authorities for Sec. Sec.  1.1297-0 and 1.1297-3 in 
numerical order;
0
4. Arranging the sectional authority for Sec.  1.1298-1 in numerical 
order and revising the authority; and
0
5. Adding a sectional authority for Sec.  1.1298-3 in numerical order.
    The additions and revisions read as follows:

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

    Section 1.953-3 also issued under 26 U.S.C. 953(c)(8).
* * * * *
    Section 1.1293-1 also issued under 26 U.S.C. 1298(g).
* * * * *
    Section 1.1295-1 also issued under 26 U.S.C. 1295(b)(2) and 
1298(g).
* * * * *
    Section 1.1296-1 also issued under 26 U.S.C. 1298(a)(1)(B) and 
(g).
* * * * *
    Section 1.1297-0 also issued under 26 U.S.C. 1298(g).
* * * * *
    Section 1.1297-3 also issued under 26 U.S.C. 1298(g).
* * * * *
    Section 1.1298-1 also issued under 26 U.S.C. 1298(f) and (g).
* * * * *
    Section 1.1298-3 also issued under 26 U.S.C. 1298(g).
* * * * *

0
Par. 2. Section 1.951A-1 is amended by revising paragraph (e) to read 
as follows:


Sec.  1.951A-1   General provisions.

* * * * *
    (e) Stock owned through domestic partnerships and S corporations--
(1) Cross-references. See Sec.  1.958-1(d) for rules regarding the 
ownership of stock of a foreign corporation through a domestic 
partnership (or S corporation, as defined in section 1361(a)(1), by 
reason of section 1373(a)) for purposes of section 951A and for 
purposes of any provision that specifically applies by reference to 
section 951A or the section 951A regulations. See Sec.  1.958-1(e) for 
rules regarding an election for certain S corporations to be treated as 
an entity for purposes of section 951A and the section 951A 
regulations.
    (2) Application of entity treatment for taxable years ending before 
June 22, 2019--(i) General rule. If a domestic partnership or S 
corporation satisfies the notification and reporting requirements in 
paragraph (e)(2)(iii) of this section, the domestic partnership or S 
corporation may apply the rules in proposed Sec.  1.951A-5 as if the 
amendments proposed on October 10, 2018, had been finalized in their 
entirety (proposed GILTI rules), for taxable years ending before June 
22, 2019.
    (ii) Inapplicability of penalties. If a domestic partnership or S 
corporation satisfies the requirements of paragraph (e)(2)(iii) of this 
section, penalties for failures described in sections 6698(a), 6699(a), 
6722(a), or any similar provision will not apply to the domestic 
partnership or S corporation to the extent such failures arise from 
acting consistently with the proposed GILTI rules before June 22, 2019.
    (iii) Notification and reporting requirements--(A) Notification. To 
be eligible for the rules described in paragraphs (e)(2)(i) and (ii) of 
this section, a domestic partnership or S corporation must provide the 
notification described in paragraphs (e)(2)(iii)(A)(1) through (3) of 
this section to each partner of the

[[Page 3909]]

partnership or shareholder of the S corporation. Such notification must 
be provided no later than the due date (taking into account extensions, 
if any, or any additional time that would have been granted if the 
domestic partnership or S corporation had made an extension request) of 
the domestic partnership's or S corporation's tax return for the last 
taxable year ending before June 22, 2019, and may be provided through 
any reasonable method, including via mail, email, or posting on a 
website through which the domestic partnership or S corporation would 
ordinarily disseminate tax information to its partners or shareholders. 
The domestic partnership or S corporation must also attach the 
notification described in this paragraph (e)(2)(iii)(A) and Form 8992, 
``U.S. Shareholder Calculation of Global Intangible Low-Taxed Income 
(GILTI),'' reflecting computations under the proposed GILTI rules to 
any tax return with respect to which the rules described in paragraph 
(e)(2)(i) or (ii) of this section are being applied if the tax return 
has not been filed as of September 9, 2019. The notification required 
under this paragraph (e)(2)(iii) must provide--
    (1) That the Schedule K-1, ``Partner's Share of Income, Deductions, 
Credits, etc.,'' or the Schedule K-1, ``Shareholder's Share of Income, 
Deductions, Credits, etc.,'' provided to the partner or shareholder, 
respectively, is consistent with the proposed GILTI rules;
    (2) Whether the domestic partnership or S corporation filed a Form 
1065, ``U.S. Return of Partnership Income,'' or Form 1120-S, ``U.S. 
Income Tax Return for an S Corporation,'' consistent with the proposed 
GILTI rules or this paragraph (e); and
    (3) That the notification is provided in accordance with Notice 
2019-46, 2019-37 I.R.B. 695.
    (B) Schedule K-1 distribution reporting. If a domestic partnership 
or S corporation furnished a Schedule K-1 based on the proposed GILTI 
rules, the domestic partnership or S corporation must separately state 
on Schedules K-1 for subsequent taxable years the partner's or 
shareholder's distributive share or pro rata share of a foreign 
corporation's distributions to the domestic partnership or S 
corporation of earnings and profits that relate to the GILTI inclusion 
amount of the partnership or S corporation that was reflected on the 
initially provided Schedules K-1. This information must be provided for 
each taxable year of the domestic partnership or S corporation 
following the taxable year to which the first Schedule K-1 relates.
* * * * *
0
Par. 3. Section 1.951A-7 is amended by adding paragraph (e) to read as 
follows:


Sec.  1.951A-7   Applicability dates.

* * * * *
    (e) Entity treatment of domestic partnerships and S corporations. 
Section 1.951A-1(e)(2) applies to taxable years of foreign corporations 
ending before June 22, 2019, and to taxable years of United States 
shareholders in which or with which such taxable years end.
0
Par. 4. Section 1.953-3 is revised to read as follows:


Sec.  1.953-3   Related person insurance income.

    (a) [Reserved]
    (b) Related person insurance income--(1) Definition of related 
person insurance income--(i) In general. Insurance income under section 
953(a) includes related person insurance income under section 
953(c)(2). Related person insurance income is premium and investment 
income attributable to an annuity, insurance, or reinsurance policy 
that directly or indirectly provides coverage to a related insured as 
defined in paragraph (b)(1)(ii) of this section. For purposes of this 
section, the terms United States shareholder and controlled foreign 
corporation have the meaning provided in section 953(c)(1).
    (ii) Related insured. Except as provided in paragraph (b)(5)(ii) of 
this section, with respect to a foreign corporation, a related insured 
means any of the following--
    (A) A United States shareholder of the foreign corporation;
    (B) A person that is related to a United States shareholder within 
the meaning of section 953(c)(6);
    (C) A pass-through entity, if a related insured (other than a pass-
through entity) owns stock in the foreign corporation indirectly 
(within the meaning of section 958(a)) through the pass-through entity; 
or
    (D) A person (other than a publicly traded corporation or publicly 
traded partnership) that is more than 50 percent owned by United States 
shareholders of the foreign corporation as described in paragraph 
(b)(1)(v) of this section.
    (iii) Amount treated as related person insurance income with 
respect to a pass-through entity--(A) In general. In the case of a 
pass-through entity that is a related insured, the amount treated as 
related person insurance income is equal to the insurance income 
attributable to the policy that directly or indirectly provides 
coverage to the pass-through entity multiplied by the fraction 
described in paragraph (b)(1)(iii)(B) of this section.
    (B) Fraction. The fraction described in this paragraph 
(b)(1)(iii)(B) is equal to--
    (1) The total amount of premiums paid or accrued by the pass-
through entity for the policy that is allocated (directly or 
indirectly, through one or more pass-through entities) to all related 
insureds (other than pass-through entities); divided by
    (2) The total amount of premiums paid or accrued by the pass-
through entity for the policy.
    (C) Allocation--(1) Partnerships. For purposes of paragraph 
(b)(1)(iii)(B) of this section, the total amount of premiums paid or 
accrued by a partnership that is allocated to the related insureds is 
determined in accordance with the partnership agreement and section 
704(b).
    (2) S corporations. For purposes of paragraph (b)(1)(iii)(B) of 
this section, the total amount of premiums paid or accrued by an S 
corporation that is allocated to the related insureds is determined on 
a pro rata basis.
    (iv) Pass-through entities. For purposes of paragraph (b)(1) of 
this section, a pass-through entity is an S corporation or a domestic 
or foreign partnership (other than a publicly traded partnership).
    (v) Ownership. The ownership threshold described in paragraph 
(b)(1)(ii)(D) of this section is met if United States shareholders 
collectively own (after applying the principles of section 958(a) and 
(b)) more than 50 percent of the stock in a corporation (by vote or 
value), more than 50 percent of the capital or profits interests in a 
partnership, or more than 50 percent of the interests in a trust or 
estate.
    (vi) Stock owned through domestic partnerships or S corporations. 
See Sec.  1.958-1(d) for rules regarding the ownership of stock of a 
foreign corporation through a domestic partnership or S corporation for 
purposes of section 953(c) and for purposes of any provision that 
specifically applies by reference to section 953(c) or the regulations 
in this part under section 953 that relate to section 953(c).
    (vii) Examples. The following examples illustrate the rules of 
paragraph (b)(1) of this section.
    (A) Example 1--(1) Facts. FC is a foreign corporation engaged in 
the insurance business. FC is wholly owned by FP, a foreign 
partnership. DC, a domestic corporation, owns 25% of the interests in 
FP. The remaining interests

[[Page 3910]]

in FP are held by unrelated foreign corporations. Under the partnership 
agreement, all items of income, gain, loss, deduction, and credit are 
allocated 25% to DC and 75% to the other partners. In Year 1, FC issues 
the FP policy, under which FP is insured. FP pays a premium of $80 for 
the FP policy. The insurance income attributable to the FP policy 
(including both premium and investment income) is $100. FC earns an 
additional $1,000 of income that is treated as related person insurance 
income. Under section 704(b), DC would be allocated $20 (25%) of the 
premium paid or accrued by FP.
    (2) Result. Under paragraph (b)(1)(ii)(C) of this section, FP is 
treated as a related insured with respect to FC because it is a pass-
through entity through which DC indirectly owns stock in FC. Therefore, 
under paragraph (b)(1)(i) of this section, a portion of the insurance 
income attributable to the FP policy is treated as related person 
insurance income. Under paragraph (b)(1)(iii)(A) of this section, the 
amount of related person insurance income with respect to FP is equal 
to the insurance income attributable to the FP policy ($100) multiplied 
by the fraction described in paragraph (b)(1)(iii)(B) of this section. 
That fraction is equal to the portion of the premium paid by FP that is 
allocable to DC ($20) divided by the total premium paid by FP ($80), or 
25%. Therefore, FC has $25 of related person insurance income under 
section 953(c)(2) attributable to the FP policy in Year 1.
    (B) Example 2--(1) Facts. FC is a foreign corporation engaged in 
the insurance business. Two domestic corporations, DC1 and DC2, each 
own 50% of the stock of FC. In addition, DC1 and DC2 each own 50% of 
the stock in DC3, a domestic corporation. In Year 1, FC issues the DC3 
policy, under which DC3 is insured. The insurance income attributable 
to the DC3 policy is $100. FC earns an additional $1,000 of income that 
is treated as related person insurance income.
    (2) Result. DC3 meets the requirements of paragraph (b)(1)(v) of 
this section because United States shareholders of FC (DC1 and DC2) 
collectively own all the stock of DC3. Therefore, under paragraph 
(b)(1)(ii)(D) of this section, DC3 is treated as a related insured with 
respect to FC. Consequently, under paragraph (b)(1)(i) of this section, 
all of FC's $100 of insurance income attributable to the DC3 policy is 
treated as related person insurance income under section 953(c)(2).
    (2) through (4) [Reserved]
    (5) Cross-insurance arrangements--(i) In general. Related person 
insurance income includes insurance income attributable to an 
arrangement (or a substantially similar arrangement with a similar 
degree of cooperative risk sharing) whereby a foreign corporation 
issues an insurance, reinsurance, or annuity contract to a person other 
than a related insured and, as part of the arrangement (involving one 
or more other persons), another person issues an insurance, 
reinsurance, or annuity contract to a related insured of the foreign 
corporation.
    (ii) Related insured. For purposes of applying paragraph (b)(5)(i) 
of this section before the applicability date described in paragraph 
(c)(1) of this section, the term related insured means, with respect to 
a foreign corporation, a United States shareholder of the foreign 
corporation or a person that is related to a United States shareholder 
within the meaning of section 953(c)(6).
    (iii) Example. Controlled foreign corporation X is owned by 30 
unrelated United States shareholders. Controlled foreign corporation Y 
is owned by 30 unrelated United States shareholders (that is, unrelated 
to X and Y and the shareholders of X and Y). X agrees to provide 
insurance protection to Y's shareholders, and Y agrees to provide 
insurance to X's shareholders. The insurance income of both X and Y 
that is attributable to insuring the shareholders of the other 
corporation constitutes related person insurance income.
    (c) Applicability date--(1) In general. Paragraph (b)(1) of this 
section applies to taxable years of foreign corporations beginning on 
or after [date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register], and to taxable 
years of United States persons in which or with which such taxable 
years of foreign corporations end.
    (2) Cross-insurance rule. Paragraph (b)(5) of this section applies 
to taxable years of foreign corporations ending on or after January 24, 
2022, and to taxable years of United States persons in which or with 
which such taxable years of foreign corporations end (in each case 
without regard to when the arrangement was entered into).
0
Par. 5. Section 1.958-1, as amended in a final rule published elsewhere 
in this issue of the Federal Register, effective January 25, 2022, is 
amended by:
0
1. Revising the first sentence of paragraph (d)(1);
0
2. Revising paragraph (d)(2)(v);
0
3. Adding a sentence to the end of paragraph (d)(4)(i); and
0
4. Adding paragraph (e).
    The revisions and addition read as follows:


Sec.  1.958-1   Direct and indirect ownership of stock.

* * * * *
    (d) * * * (1) * * * Except as otherwise provided in paragraph 
(d)(2) of this section, for purposes of sections 951, 951A, 953(c), and 
956(a) and Sec.  1.964-1(c), and for purposes of any provision that 
specifically applies by reference to any of such sections or the 
regulations in this part under section 951, 951A, 953, or 956 (but only 
as the regulations in this part under section 953 or section 956 relate 
to section 953(c) or section 956(a), respectively), a domestic 
partnership is not treated as owning stock of a foreign corporation 
within the meaning of section 958(a). * * *
    (2) * * *
    (v) Applying section 953(c)(1)(A) for purposes of determining 
whether any foreign corporation is a controlled foreign corporation as 
defined in sections 953(c)(1)(B), 953(c)(3)(E), or 953(d)(1)(A).
* * * * *
    (4) * * *
    (i) * * * Notwithstanding the prior sentences, paragraph (d)(2)(v) 
of this section and the inclusion of the references to section 953(c) 
and Sec.  1.964-1(c) in paragraph (d)(1) of this section apply to 
taxable years of foreign corporations beginning on or after [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register], and to taxable years of United 
States persons in which or with which such taxable years of foreign 
corporations end.
* * * * *
    (e) Elective entity treatment for certain S corporations--(1) In 
general. Except as otherwise provided in this paragraph (e), with 
respect to an S corporation (as defined in section 1361(a)(1)), 
paragraph (d)(1) of this section shall not apply, and such S 
corporation shall be treated as owning stock of a foreign corporation 
within the meaning of section 958(a), if--
    (i) The S corporation and its shareholders (where applicable) make 
the election described in paragraph (e)(2) of this section;
    (ii) The S corporation made its election under section 1362(a) 
before June 22, 2019;
    (iii) The S corporation would have been treated as owning stock of 
a controlled foreign corporation within the meaning of section 958(a) 
on June 22, 2019, if Sec.  1.951A-1(e) (as in effect and contained in 
26 CFR part 1, as

[[Page 3911]]

revised April 1, 2021) did not apply to it;
    (iv) The S corporation had transition accumulated earnings and 
profits (as defined in paragraph (e)(3) of this section) on September 
1, 2020, or on the first day of any subsequent taxable year; and
    (v) The S corporation maintains sufficient records to support the 
determination of the transition accumulated earnings and profits 
amount.
    (2) Election--(i) Time and manner of making election. With respect 
to the first taxable year ending on or after September 1, 2020, an S 
corporation may irrevocably elect to apply the provisions of paragraph 
(e)(1) of this section on a timely-filed (including extensions) 
original Form 1120-S, ``U.S. Income Tax Return for an S Corporation,'' 
by attaching a statement to such return including the contents of 
paragraph (e)(2)(ii) of this section. For taxable years of an S 
corporation ending before September 1, 2020, and after June 21, 2019, 
the S corporation and all of its shareholders may irrevocably elect to 
apply the provisions of paragraph (e)(1) of this section on timely-
filed (including extensions) original returns or on amended returns 
filed by March 15, 2021, by attaching a statement including the 
contents of paragraph (e)(2)(ii) of this section thereto. An election 
described in Section 3.02 of Notice 2020-69, 2020-39 I.R.B. 604 that is 
filed (in the time and manner specified in Section 3.02 of Notice 2020-
69) on or before [date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register] is deemed to 
satisfy the election requirement of this paragraph (e)(2).
    (ii) Contents of election statement. The statement described in 
paragraph (e)(2)(i) of this section must:
    (A) Identify that the S corporation and its shareholders (where 
applicable) are electing for the S corporation to be treated as owning 
stock of a foreign corporation within the meaning of section 958(a) 
under paragraph (e)(2) of this section;
    (B) Include the amount of transition accumulated earnings and 
profits (as defined in paragraph (e)(3) of this section); and
    (C) Where applicable, be signed by a person authorized to sign the 
S corporation's return that is required to be filed under section 6037.
    (3) Transition accumulated earnings and profits--(i) In general. 
For purposes of this section, the term transition accumulated earnings 
and profits means, with respect to an S corporation and its 
shareholders, the amount of accumulated earnings and profits of the S 
corporation calculated as of September 1, 2020, reduced as described in 
paragraph (e)(3)(ii) of this section. Transition accumulated earnings 
and profits are not increased as a result of transactions occurring (or 
entity classification elections described in Sec.  301.7701-3 of this 
chapter filed) after September 1, 2020. For purposes of this section, 
transition accumulated earnings and profits are not transferable to 
another person under any provision of the Code.
    (ii) Reduction solely by distributions. An S corporation with 
transition accumulated earnings and profits is treated as having no 
transition accumulated earnings and profits if, beginning after 
September 1, 2020, the S corporation distributes in one or more 
distributions a cumulative amount of accumulated earnings and profits 
equal to or greater than the amount of the S corporation's transition 
accumulated earnings and profits as of September 1, 2020.
    (4) Required aggregate treatment. In the case of an S corporation 
that has made an election under paragraph (e)(2) of this section and 
which satisfies the additional requirements of paragraph (e)(1) of this 
section, paragraph (d) of this section shall apply beginning with the S 
corporation's first taxable year for which the S corporation has no 
transition accumulated earnings and profits on the first day of that 
year, and to each subsequent taxable year of the S corporation.
    (5) Examples. The following examples illustrate the application of 
paragraph (e).
    (i) Example 1--(A) Facts. Individual A and Individual B, each a 
United States citizen, respectively own 5% and 95% of the single class 
of stock of SCX, an S corporation. SCX's sole asset is 100% of the 
single class of stock of FC, a controlled foreign corporation, which 
SCX has held since June 1, 2019. None of SCX, Individual A, or 
Individual B own shares, directly or indirectly, in any other 
controlled foreign corporation. Individual A, Individual B, SCX, and FC 
all use the calendar year as their taxable year. On January 1, 2021, 
SCX has transition accumulated earnings and profits of $100x and AAA of 
$0. SCX elects to apply the transition rules under paragraph (e)(1) of 
this section. During the 2021 taxable year, FC has $200x of tested 
income (within the meaning of Sec.  1.951A-2(b)(1)) and $0 of qualified 
business asset investment (QBAI) (within the meaning of Sec.  1.951A-
3(b)).
    (B) Analysis--(1) S corporation level. As an electing S corporation 
with transition accumulated earnings and profits on the first day of 
the taxable year (January 1, 2021), SCX is treated as owning (within 
the meaning of section 958(a)) all the stock of FC for purposes of 
applying sections 951 and 951A and any provision that applies 
specifically by reference thereto. Accordingly, SCX, a United States 
shareholder of FC, determines its GILTI inclusion amount under Sec.  
1.951A-1(c)(1) for its 2021 taxable year. SCX's pro rata share of FC's 
tested income is $200x, and its pro rata share of FC's QBAI is $0. 
SCX's net CFC tested income (within the meaning of Sec.  1.951A-
1(c)(2)) is $200x, and its net deemed tangible income return (within 
the meaning of Sec.  1.951A-1(c)(3)) is $0. As a result, SCX's GILTI 
inclusion amount for 2021 is $200x. At the end of 2021, SCX increases 
its AAA by $200x to reflect the GILTI inclusion amount. Because SCX 
computes its income as an individual under section 1363(b), it cannot 
take a section 250 deduction for any GILTI inclusion amount. See Sec.  
1.250(a)-1(c)(1).
    (2) S corporation shareholder level. Neither Individual A nor 
Individual B is treated as owning the stock in FC within the meaning of 
section 958(a). Accordingly, Individual A and Individual B include in 
gross income their pro rata shares of SCX's GILTI inclusion amount as 
described in section 1366(a), which is $10x ($200x x 5%) for Individual 
A and $190x ($200x x 95%) for Individual B.
    (ii) Example 2--(A) Facts. The facts are the same as in paragraph 
(e)(5)(i) of this section, except that, on December 31, 2021, SCX 
distributes $300x to its shareholders. In addition, FC has an 
additional $200x of tested income (within the meaning of Sec.  1.951A-
2(b)(1)) and $0 of QBAI (within the meaning of Sec.  1.951A-3(b)) 
during the 2022 taxable year.
    (B) Analysis--(1) Determination of transition accumulated earnings 
and profits. Before taking into account the distribution on December 
31, 2021, the results for taxable year 2021 are the same as in 
paragraph (e)(5)(i)(B) of this section. For 2021, $200x, the portion of 
SCX's $300x distribution that does not exceed AAA, is subject to 
section 1368(c)(1). The remaining distribution of $100x is treated as a 
dividend under section 316 to the extent of SCX's accumulated earnings 
and profits. As of January 1, 2022, SCX has $0 of transition 
accumulated earnings and profits under paragraph (e)(3) of this section 
because the cumulative amount of SCX's distributions out of accumulated 
earnings and profits after

[[Page 3912]]

September 1, 2020, equals or exceeds the amount of SCX's transition 
accumulated earnings and profits as of September 1, 2020.
    (2) S corporation level. Because SCX has no transition accumulated 
earnings and profits as of January 1, 2022, paragraph (d) of this 
section applies to SCX for its taxable year 2022 and for each 
subsequent taxable year. As a result, for purposes of determining a 
GILTI inclusion amount in its taxable year 2022, SCX is not treated as 
owning (within the meaning of section 958(a)) the FC stock; instead, 
SCX is treated in the same manner as a foreign partnership for purposes 
of determining the FC stock owned by Individual A and Individual B 
under section 958(a)(2). Accordingly, SCX does not have a GILTI 
inclusion amount for its 2022 taxable year (or for any subsequent 
taxable year) and therefore will not increase its AAA as a result of 
GILTI inclusion amounts attributable to FC stock for its taxable year 
2022 (or for any subsequent taxable year).
    (3) S corporation shareholder level. With respect to Individual A, 
for purposes of determining the GILTI inclusion amount for taxable year 
2022, Individual A is treated as owning 5% of the FC stock under 
section 958(a). Individual A is not a United States shareholder of FC 
because Individual A owns (within the meaning of section 958(a) and 
(b)) less than 10% of the FC stock. Accordingly, Individual A does not 
have a GILTI inclusion amount for taxable year 2022. With respect to 
Individual B, for purposes of determining the GILTI inclusion amount 
for taxable year 2022, Individual B is treated as owning 95% of the FC 
stock under section 958(a). In addition, Individual B is a United 
States shareholder of FC because Individual B owns (within the meaning 
of section 958(a) and (b)) at least 10% of the FC stock. Accordingly, 
Individual B's pro rata share of FC's tested income is $190x ($200x x 
95%), and Individual B's pro rata share of FC's QBAI is $0. Individual 
B's net CFC tested income is $190x, and Individual B's net deemed 
tangible income return is $0. As a result, Individual B's GILTI 
inclusion amount for taxable year 2022 is $190x.
    (6) Applicability date. This paragraph (e) applies to taxable years 
of S corporations ending on or after September 1, 2020. Taxpayers may 
choose to apply this paragraph (e) to taxable years of S corporations 
ending on or after June 22, 2019, provided that the S corporation and 
its shareholders that are United States shareholders consistently apply 
the rules set forth in this paragraph (e) with respect to all 
controlled foreign corporations whose stock the S corporation owns 
within the meaning of section 958(a).
* * * * *
0
Par. 6. Section 1.964-1 is amended by:
0
1. Revising the first sentence of paragraph (c)(2);
0
2. Removing the language ``domestic shareholders'' in the first 
sentence of paragraph (c)(3)(ii) and adding ``United States persons'' 
in its place;
0
3. Revising paragraph (c)(3)(iii);
0
4. Removing the language ``noncontrolled section 902 corporation'' in 
paragraphs (c)(4)(i)(B) and (c)(4)(ii) and adding ``noncontrolled 
foreign corporation'' in its place;
0
5. Revising paragraph (c)(5)(ii);
0
6. Redesignating paragraph (c)(8) as paragraph (c)(9);
0
7. Adding a new paragraph (c)(8); and
0
8. In paragraph (d):
0
i. Revising the heading;
0
ii. Removing ``Paragraphs (c)(1)(v) through (c)(6),'' ``26 CFR 1.964-
1T(c)(1)(v) through (c)(6),'' and ``paragraphs (c)(1)(v) through 
(c)(6)'' everywhere they appear and adding ``Paragraphs (c)(1)(v) and 
(vi) and (c)(2) through (6),'' ``26 CFR 1.964-1T(c)(1)(v) and (vi) and 
(c)(2) through (6),'' and ``paragraphs (c)(1)(v) and (vi) and (c)(2) 
through (6)'' in their places, respectively; and
0
iii. Adding two sentences to the end of the paragraph.
    The revisions and additions read as follows:


Sec.  1.964-1   Determination of the earnings and profits of a foreign 
corporation.

* * * * *
    (c) * * *
    (2) * * * For the first taxable year of a foreign corporation in 
which such foreign corporation first qualifies as a controlled foreign 
corporation (as defined in section 957 or 953) or a foreign corporation 
(other than a controlled foreign corporation as defined in section 957 
or 953) as to which a United States person that is a United States 
shareholder (within the meaning of section 951(b)) owns stock (within 
the meaning of section 958(a)) (such corporation, a ``noncontrolled 
foreign corporation''), any method of accounting or taxable year 
allowable under this section may be adopted, and any election allowable 
under this section may be made, by such foreign corporation or on its 
behalf notwithstanding that, in previous years, its books or financial 
statements were prepared on a different basis, and notwithstanding that 
such election is required by the Code or regulations in this chapter to 
be made in a prior taxable year. * * *
    (3) * * *
    (iii) Notice--(A) In general. Except as otherwise provided in 
paragraph (c)(3)(iii)(B) of this section, on or before the filing date 
described in paragraph (c)(3)(ii) of this section, the controlling 
domestic shareholders must provide written notice of the election made 
or the adoption or change of method or taxable year effected to all 
other persons known by them to be United States persons that own 
(within the meaning of section 958(a)) stock of the foreign corporation 
(domestic shareholders) and to any other United States person that is a 
``Category 4 filer'' of Form 5471, ``Information Return of U.S. Persons 
With Respect to Certain Foreign Corporations,'' with respect to the 
foreign corporation (that is, certain United States persons that 
control, within the meaning of section 6038(e), the foreign 
corporation). Thus, for example, this notice is required to be provided 
to domestic shareholders that own (within the meaning of section 
958(a)) stock in the foreign corporation through one or more domestic 
partnerships. The notice required in this paragraph (c)(3)(iii)(A) must 
set forth the name, country of organization, and U.S. employer 
identification number (if applicable) of the foreign corporation, and 
the names, addresses, and stock interests of the controlling domestic 
shareholders. Such notice must also describe the nature of the action 
taken on behalf of the foreign corporation and the taxable year for 
which made, and identify a designated shareholder that retains a 
jointly executed consent confirming that such action has been approved 
by all of the controlling domestic shareholders and containing the 
signature of a principal officer of each such shareholder (or its 
common parent). However, the failure of the controlling domestic 
shareholders to provide such notice to a person required to be notified 
does not invalidate the election made or the adoption or change of 
method or taxable year effected.
    (B) Special rule for domestic partnerships. A controlling domestic 
shareholder will be deemed to satisfy the notice requirement of 
paragraph (c)(3)(iii)(A) of this section with respect to any domestic 
shareholder that is a partner in a domestic partnership by providing 
notice to a domestic partnership (known to the controlling domestic 
shareholder) through which the domestic shareholder owns stock of the 
foreign corporation, instead of to the domestic shareholder.
* * * * *
    (5) * * *

[[Page 3913]]

    (ii) Noncontrolled foreign corporations. For purposes of this 
paragraph (c), the controlling domestic shareholders of a noncontrolled 
foreign corporation are its majority domestic shareholders. The 
majority domestic shareholders of a noncontrolled foreign corporation 
are those United States shareholders (within the meaning of section 
951(b)) that own (within the meaning of section 958(a)) stock in the 
noncontrolled foreign corporation and that, in the aggregate, own 
(within the meaning of section 958(a)), or are considered as owning by 
applying the rules of section 958(b), more than 50 percent of the 
combined voting power of all of the voting stock of the noncontrolled 
foreign corporation that is owned by all United States shareholders 
that own (within the meaning of section 958(a)), or are considered as 
owning by applying the rules of section 958(b), stock of the 
noncontrolled foreign corporation.
* * * * *
    (8) Stock owned through domestic partnerships. See Sec.  1.958-1(d) 
for rules regarding the ownership of stock of a foreign corporation 
through a domestic partnership for purposes of paragraph (c) of this 
section and for purposes of any provision that specifically applies by 
reference to paragraph (c) of this section.
* * * * *
    (d) Applicability dates. * * * Notwithstanding the preceding 
sentences in this paragraph (d), paragraphs (c)(2), (c)(3)(ii) and 
(iii), (c)(4)(i)(B), (c)(4)(ii), (c)(5)(ii), and (c)(8) of this section 
apply to taxable years of foreign corporations beginning on or after 
[date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register], and to taxable years of 
United States persons in which or with which such taxable years end. 
For taxable years of foreign corporations beginning before [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register], and to taxable years of foreign 
United States persons in which or with which such taxable years end, 
see Sec.  1.964-1(c)(2), (c)(3)(ii) and (iii), (c)(4)(i)(B), 
(c)(4)(ii), and (c)(5)(ii) as in effect and contained in 26 CFR part 1, 
as revised April 1, 2021.
0
Par. 7. Section 1.1291-1 is amended by:
0
1. Revising paragraphs (b)(7), (c)(4)(i), and (c)(4)(ii)(A) and (B);
0
2. Adding paragraph (c)(5);
0
3. Removing the language ``Paragraphs (c)(3) and (4)'' in paragraph 
(j)(1) and adding ``Paragraph (c)(3)'' in its place;
0
4. Removing the language ``paragraphs (b)(2)(ii) and (v), (b)(7) and 
(8), and (e)(2) of this section'' in paragraph (j)(3) and adding 
``paragraphs (b)(2)(ii) and (v), (b)(8), and (e)(2) of this section'' 
in its place; and
0
5. Adding paragraph (j)(5).
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (7) Shareholder. Except as otherwise provided in this paragraph 
(b)(7) or paragraph (e) of this section, a shareholder of a PFIC is a 
United States person that directly owns stock of a PFIC (a direct 
shareholder), or that is an indirect shareholder (as defined in 
paragraph (b)(8) of this section). Notwithstanding the previous 
sentence, neither a domestic partnership nor an S corporation (as 
defined in section 1361(a)(1)) is treated as a shareholder of a PFIC. 
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).
* * * * *
    (c) * * *
    (4) * * * (i) In general. If PFIC stock is marked to market for any 
taxable year under section 475 or any other provision of chapter 1 of 
the Internal Revenue Code, other than section 1296, regardless of 
whether the application of such provision is mandatory or results from 
an election by the shareholder (as defined in paragraph (b)(7) of this 
section) or another person, then, except as provided in paragraph 
(c)(4)(ii) of this section, section 1291 and the regulations in this 
part thereunder do not apply to any distribution with respect to such 
PFIC stock or to any disposition of such PFIC stock for such taxable 
year. See Sec. Sec.  1.1295-1(i)(3) and 1.1296-1(h)(3)(i) for rules 
regarding the automatic termination of an existing election under 
section 1295 or section 1296 when a shareholder marks to market PFIC 
stock under section 475 or any other provision of chapter 1 of the 
Internal Revenue Code.
    (ii) * * * (A) Notwithstanding any provision in this section to the 
contrary, with respect to a shareholder (as defined in paragraph (b)(7) 
of this section), the rule of paragraph (c)(4)(ii)(B) of this section 
applies to the first taxable year in which the shareholder's PFIC stock 
is marked to market under a provision of chapter 1 of the Internal 
Revenue Code, other than section 1296, if such foreign corporation was 
a PFIC for any taxable year before the taxable year in which the PFIC 
stock is marked to market, which is during the shareholder's holding 
period (as defined in section 1291(a)(3)(A) and Sec.  1.1296-1(f)) in 
such stock, and for which such corporation was not treated as a QEF 
with respect to such shareholder.
    (B) For the first taxable year of a shareholder in which the 
shareholder's PFIC stock is marked to market under any provision of 
chapter 1 of the Internal Revenue Code, other than section 1296, such 
shareholder, in lieu of the rules under which the stock is marked to 
market, applies the rules of Sec.  1.1296-1(i)(2) and (3) as if an 
election had been made under section 1296 for such first taxable year.
    (5) Coordination with section 1297(d)--(i) In general. For purposes 
of section 1297(d), with respect to a partner or S corporation 
shareholder that would be considered an indirect shareholder, through 
its ownership in a domestic partnership or S corporation, with respect 
to a foreign corporation that is a PFIC and a controlled foreign 
corporation (as defined in section 957), the term ``qualified portion'' 
does not include any portion of such indirect shareholder's holding 
period during which it was not a United States shareholder (as defined 
in section 951(b)) with respect to the foreign corporation.
    (ii) Transition rule. For taxable years of shareholders beginning 
before [date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register], or for taxable 
years of shareholders of an S corporation in which the S corporation 
elects to apply Sec.  1.958-1(e), for purposes of section 1297(d), a 
partner's or S corporation shareholder's qualified portion with respect 
to the foreign corporation includes the portion of its holding period 
during which it--
    (A) Is an indirect shareholder under paragraph (b)(8)(iii)(A) or 
(B) of this section with respect to the foreign corporation; and
    (B) Included in gross income its distributive or pro rata share of 
any amount that the domestic partnership or S corporation, 
respectively, included under sections 951(a)(1) and 951A(a) with 
respect to stock in the foreign corporation (treating the requirement 
in this paragraph (c)(5)(ii)(B) as not satisfied to the extent Sec.  
1.958-1(d)(1) through (3) is applied with respect to

[[Page 3914]]

the domestic partnership or S corporation before their general 
applicability date under Sec.  1.958-1(d)(4) or the domestic 
partnership or S corporation relied on the earlier proposed version of 
such provisions). See, for example, Sec.  1.951A-1(e)(2).
* * * * *
    (j) * * *
    (5) Paragraphs (b)(7), (c)(4)(i), (c)(4)(ii)(A) and (B), and (c)(5) 
of this section apply to taxable years of shareholders beginning on or 
after [date of publication of the Treasury decision adopting these 
rules as final regulations in the Federal Register]. For taxable years 
of shareholders beginning before [date of publication of the Treasury 
decision adopting these rules as final regulations in the Federal 
Register], see Sec.  1.1291-1(b)(7), (c)(4)(i), and (c)(4)(ii)(A) and 
(B) as in effect and contained in 26 CFR part 1, as revised April 1, 
2021.


Sec.  1.1291-9   [Amended]

0
Par. 8. Section 1.1291-9 is amended by:
0
1. Removing the language ``the undistributed earnings and profits, 
within the meaning of section 902(c)(1)'' in paragraph (a)(2)(i) and 
adding ``the amount of the earnings and profits of the foreign 
corporation (computed in accordance with sections 964(a) and 986)'' in 
its place;
0
2. Removing the language ``section 1297(e) PFIC'' in paragraphs (i) and 
(j)(2)(v) introductory text and adding ``section 1297(d) PFIC'' in its 
place wherever it appears; and
0
3. Removing the language ``section 1297(e)(2)'' in paragraph 
(j)(2)(v)(A) and adding ``section 1297(d)(2)'' in its place.
0
Par. 9. Section 1.1293-1 is amended by:
0
1. Adding paragraphs (a)(3) and (4);
0
2. Revising paragraphs (c)(1) and (2);
0
3. Redesignating paragraph (c)(3) as paragraph (c)(4);
0
4. Adding a new paragraph (c)(3); and
0
5. Revising newly redesignated paragraph (c)(4).
    The additions and revisions read as follows:


Sec.  1.1293-1   Current taxation of income from qualified electing 
funds.

    (a) * * *
    (3) Pass-through entity defined. For purposes of this section, the 
term pass-through entity has the meaning provided in Sec.  1.1295-
1(j)(2).
    (4) Applicability dates. Paragraph (a)(3) of this section applies 
to taxable years of shareholders beginning on or after [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register].
* * * * *
    (c) * * * (1) In general. Except as otherwise provided in this 
paragraph (c), a shareholder that makes a section 1295 election as 
provided in Sec.  1.1295-1(d)(2) with respect to stock in a PFIC that 
it is treated as owning by reason of an interest in a pass-through 
entity, or a shareholder that is treated as owning stock in a QEF by 
reason of an interest in a domestic partnership that has made a 
preexisting partnership section 1295 election (within the meaning of 
Sec.  1.1295-1(d)(2)(i)(B)) or in an S corporation that has made a 
preexisting S corporation section 1295 election (within the meaning of 
Sec.  1.1295-1(d)(2)(ii)(B)), includes in income its pro rata share of 
ordinary earnings and net capital gain attributable to the QEF stock as 
if the shareholder directly owned its share of the QEF stock held by 
the pass-through entity.
    (2) Section 1295 election made by domestic nongrantor trust or 
domestic estate. Notwithstanding paragraph (c)(1) of this section, if a 
domestic nongrantor trust or domestic estate makes a section 1295 
election as provided in Sec.  1.1295-1(d)(2)(iii)(A)(1) with respect to 
PFIC stock that it owns, the domestic nongrantor trust or domestic 
estate includes in income its pro rata share of ordinary earnings and 
net capital gain attributable to the QEF stock. A shareholder that is 
treated as owning such QEF stock by reason of an interest in the 
domestic nongrantor trust or domestic estate accounts for its pro rata 
share of ordinary earnings and net capital gain attributable to such 
stock according to the general rules applicable to inclusions of income 
from the domestic nongrantor trust or domestic estate.
    (3) QEF stock transferred to a pass-through entity--(i) In general. 
Except as otherwise provided in this paragraph (c)(3), if a shareholder 
transfers stock in a PFIC subject to a section 1295 election to a pass-
through entity in which it is an interest holder, such shareholder 
continues to include in income its pro rata share of ordinary earnings 
and net capital gain attributable to the QEF stock held by the 
transferee pass-through entity, under paragraph (c)(1) of this section. 
Proper adjustments to reflect an inclusion in income under section 1293 
by the indirect shareholder must be made, under the principles of Sec.  
1.1291-9(f), to the basis of the indirect shareholder's interest in the 
pass-through entity.
    (ii) Shareholders other than the transferor. Except as otherwise 
provided in this paragraph (c)(3), if a shareholder transfers stock in 
a PFIC subject to a section 1295 election to a pass-through entity and 
such stock is not subject to a preexisting QEF election made by the 
pass-through entity, any other person that becomes a shareholder of 
such PFIC as a result of the transfer will be subject to the income 
inclusion rules of this section only if such person makes a section 
1295 election with respect to the transferred PFIC stock under Sec.  
1.1295-1(d)(2).
    (iii) QEF stock transferred to domestic nongrantor trust. 
Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, if a 
shareholder transfers stock in a PFIC subject to a section 1295 
election to a domestic nongrantor trust in which it is a beneficiary, 
and the transferee domestic nongrantor trust makes a section 1295 
election with respect to that stock pursuant to Sec.  1.1295-
1(d)(2)(iii)(A)(1), the domestic nongrantor trust, and the transferor 
and any person that becomes a shareholder of the QEF as a result of the 
transfer, take into account their share of ordinary earnings and net 
capital gain attributable to the QEF shares under paragraph (c)(2) of 
this section. If the transferee domestic nongrantor trust does not make 
a section 1295 election with respect to the transferred PFIC stock, the 
transferor continues to be subject, in its capacity as an indirect 
shareholder, to the income inclusion rules of paragraph (c)(1) of this 
section.
    (4) Applicability date. Paragraph (c) of this section applies to 
taxable years of shareholders beginning on or after [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register]. For taxable years of shareholders 
beginning before [date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register], see Sec.  
1.1293-1(c), as in effect and contained in 26 CFR part 1, as revised 
April 1, 2021.
0
Par. 10. Section 1.1295-1 is amended by:
0
1. Revising paragraph (b)(3);
0
2. Removing the language ``are defined in paragraph (j) of this 
section'' in paragraph (c)(1) and adding ``are defined in paragraphs 
(j)(3) and (4) of this section, respectively'' in its place;
0
3. Removing the language ``(as defined in paragraph (j) of this 
section)'' in paragraph (c)(2)(iv) and adding ``(as defined in 
paragraph (j)(2) of this section)'' in its place;
0
4. Revising paragraphs (d)(1), (d)(2)(i)(A) and (B), and (d)(2)(ii);
0
5. In paragraph (d)(2)(iii)(A)(1):
0
i. Removing the language ``Sec.  1.1293-1(c)(1)'' and adding ``Sec.  
1.1293-1(c)(2)'' in its place; and
0
ii. Removing the language ``domestic trust or estate'' and adding 
``domestic

[[Page 3915]]

nongrantor trust or domestic estate'' in its place;
0
6. Revising paragraph (f)(2)(i) introductory text;
0
7. Redesignating paragraph (f)(3) as paragraph (f)(5);
0
8. Adding a new paragraph (f)(3) and paragraph (f)(4);
0
9. Removing the language ``as defined in paragraph (j) of this 
section'' in paragraph (g)(3) and adding ``as defined in paragraph 
(j)(1) of this section'' in its place;
0
10. Removing the language ``(as defined in paragraph (j) of this 
section)'' and ``Sec.  1.1295-1'' in paragraph (h) and adding ``(as 
defined in paragraph (j)(4) of this section)'' and ``this section'' in 
their places, respectively;
0
11. Removing and reserving paragraph (i)(1)(ii);
0
12. Revising paragraph (j); and
0
13. In paragraph (k):
0
i. Revising the heading;
0
ii. Removing the language ``(b)(3),'' in the first sentence;
0
iii. Removing the language ``and (c) through (j) of this section'' in 
the first sentence and adding ``(c), (d)(2)(iv), (d)(3) through (d)(6), 
(e), (f)(1), (f)(2)(ii), (g), (h), (i)(1)(i) and (iii), and (i)(2) 
through (5) of this section'' in its place;
0
iv. Removing the language ``(f) and (g) of this section'' in the second 
sentence of and adding ``(f)(1), (f)(2)(ii), and (g) of this section'' 
in its place;
0
v. Removing the third sentence; and
0
vi. Adding two sentences at the end of the paragraph.
    The revisions and additions read as follows:


Sec.  1.1295-1   Qualified electing funds.

* * * * *
    (b) * * *
    (3) Application of general rules to stock held by a pass through 
entity--(i) Stock subject to a section 1295 election transferred to a 
domestic nongrantor trust or domestic estate. A shareholder's section 
1295 election will not apply to a domestic nongrantor trust or domestic 
estate to which the shareholder transfers stock subject to a section 
1295 election, or to any other United States person that is a 
beneficiary of the domestic nongrantor trust or estate. However, as 
provided in paragraph (c)(2)(iv) of this section (relating to a 
transfer to a domestic pass through entity of stock subject to a 
section 1295 election), a shareholder that transfers stock subject to a 
section 1295 election to a domestic nongrantor trust or domestic estate 
will continue to be subject to the section 1295 election with respect 
to the stock indirectly owned through the domestic nongrantor trust or 
domestic estate and any other stock of that PFIC owned by the 
shareholder.
    (ii) Limitation on application of domestic nongrantor trust's or 
domestic estate's section 1295 election. Except as provided in 
paragraph (c)(2)(iv) of this section, a section 1295 election made by a 
domestic nongrantor trust or domestic estate does not apply to other 
stock of the PFIC held directly or indirectly by the beneficiary.
    (iii) Effect of partnership termination on preexisting partnership 
section 1295 election. The termination of a preexisting partnership 
section 1295 election (within the meaning of paragraph (d)(2)(i)(B) of 
this section) by reason of the termination of the partnership under 
section 708(b) will not terminate the section 1295 election with 
respect to partners of the terminated partnership that are partners of 
the new partnership (continuing partners). The stock of the PFIC of 
which a new partner (partners other than continuing partners) is an 
indirect shareholder will be treated as stock of a QEF with respect to 
such partner only if the new partner makes or has made a section 1295 
election with respect to that stock under paragraph (d)(2)(i)(A) of 
this section.
    (iv) Characterization of stock held through a pass-through entity. 
Stock of a PFIC held through a pass-through entity will be treated as 
stock of a pedigreed QEF with respect to a shareholder (as defined in 
paragraph (j)(3) of this section) that is treated as owning such stock 
by reason of an interest in the pass-through entity only if--
    (A) In the case of PFIC stock acquired (other than in a transaction 
in which gain is not fully recognized, including pursuant to 
regulations in this part under section 1291(f)) and held by a domestic 
pass-through entity, the domestic pass-through entity has made a 
preexisting section 1295 election under paragraph (d)(2)(i)(B) or 
(d)(2)(ii)(B) of this section, or makes an election under paragraph 
(d)(2)(iii)(A)(1) of this section, and the PFIC has been a QEF with 
respect to the pass-through entity for all taxable years that are 
included in the pass-through entity's holding period of the PFIC stock 
and during which the foreign corporation was a PFIC within the meaning 
of Sec.  1.1291-9(j)(1);
    (B) In the case of PFIC stock acquired (other than in a transaction 
in which gain is not fully recognized, including pursuant to 
regulations in this part under section 1291(f)) and held by a domestic 
pass-through entity, other than PFIC stock described in paragraph 
(b)(3)(iv)(A) of this section, through which the shareholder is treated 
as owning such PFIC stock, the shareholder makes the section 1295 
election under paragraph (d)(2)(i)(A), (d)(2)(ii)(A), 
(d)(2)(iii)(A)(2), or (d)(2)(iii)(B) of this section, and the PFIC has 
been a QEF with respect to the shareholder for all taxable years that 
are included in the shareholder's holding period for the PFIC stock, 
and during which the foreign corporation was a PFIC within the meaning 
of Sec.  1.1291-9(j)(1); or
    (C) In the case of PFIC stock transferred by an interest holder or 
beneficiary to a pass-through entity in a transaction in which gain is 
not fully recognized (including pursuant to regulations in this part 
under section 1291(f)), if the pass-through entity made a preexisting 
section 1295 election under paragraph (d)(2)(i)(B) or (d)(2)(ii)(B) of 
this section with respect to the PFIC stock, or the shareholder or 
pass-through entity, as applicable, makes a section 1295 election under 
paragraph (d)(2)(i)(A), (d)(2)(ii)(A), (d)(2)(iii)(A)(1) or (2), or 
(d)(2)(iii)(B) of this section, in each case for the taxable year in 
which the transfer was made, or the shareholder's section 1295 election 
continues pursuant to paragraph (c)(2)(iv) of this section. If the 
foreign corporation was a PFIC within the meaning of Sec.  1.1291-9(j) 
at the time of the transfer, the PFIC stock transferred will be treated 
as stock of a pedigreed QEF with respect to a transferor, however, only 
if that stock was treated as stock of a pedigreed QEF with respect to 
the transferor at the time of the transfer. In all cases subject to 
this paragraph (b)(3)(iv)(C), the PFIC stock will be treated as stock 
of a pedigreed QEF only if the PFIC has been a QEF for all taxable 
years of the PFIC that are included wholly or partly in the 
shareholder's holding period of the PFIC stock during which the foreign 
corporation was a PFIC within the meaning of Sec.  1.1291-9(j).
    (v) Characterization of stock distributed by a partnership. In the 
case of PFIC stock distributed by a partnership to one or more partners 
in a transaction in which gain is not fully recognized (including 
pursuant to regulations in this part under section 1291(f)), the PFIC 
stock will be treated as stock of a pedigreed QEF by a shareholder only 
if that stock was treated as stock of a pedigreed QEF with respect to 
the shareholder immediately before the distribution, or, in the case of 
a distribution of PFIC stock by a partnership to one or more partners 
in the first year of the distributee partner or partners' holding 
period of the PFIC stock, the distributee partner or partners

[[Page 3916]]

make an election as provided in paragraph (d)(2) of this section.
* * * * *
    (d) * * * (1) General rule. Except as otherwise provided in this 
paragraph (d), any shareholder (as defined in paragraph (j)(3) of this 
section) of a PFIC, including a shareholder that holds stock of a PFIC 
in bearer form, may make a section 1295 election with respect to that 
PFIC. The shareholder need not own directly or indirectly any stock of 
the PFIC when the shareholder makes the section 1295 election provided 
the shareholder is a shareholder of the PFIC during the taxable year of 
the PFIC that ends with or within the taxable year of the shareholder 
for which the section 1295 election is made.
    (2) * * * (i) * * * (A) In general. If a partnership (domestic or 
foreign) holds stock of a PFIC, the section 1295 election with respect 
to such PFIC is made by a shareholder (as defined in paragraph (j)(3) 
of this section) indirectly owning the PFIC stock by reason of its 
interest in the partnership. A section 1295 election made by a 
shareholder under this paragraph (d)(2)(i)(A) applies to the stock of 
the PFIC indirectly owned by the shareholder by reason of its interest 
in the partnership and to any other stock of the PFIC owned by the 
shareholder. A shareholder making an election under this paragraph 
(d)(2)(i)(A) must do so in the form and manner provided in paragraph 
(f) of this section. The shareholder must also notify the partnership 
of the election no later than 30 days after filing the return in which 
the election is made; the shareholder may notify the partnership in any 
reasonable manner. However, the failure of the shareholder to notify 
the partnership of its election does not invalidate an otherwise valid 
election under this paragraph (d)(2)(i)(A). A shareholder making an 
election under this paragraph (d)(2)(i)(A) accounts for its pro rata 
share of ordinary earnings and net capital gain attributable to the QEF 
stock as provided in Sec.  1.1293-1(c)(1).
    (B) Preexisting section 1295 election by domestic partnership. Any 
section 1295 election made by a domestic partnership with respect to a 
PFIC effective for taxable years of the PFIC ending on or before [date 
of publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register] (preexisting partnership section 
1295 election) will be treated as if it were made by each shareholder 
that is treated as owning stock in the PFIC by reason of its interest 
in the domestic partnership on or before such date, and the stock in 
the PFIC will continue to be treated as stock in a QEF to such 
shareholder; any partner that becomes a shareholder of the PFIC by 
acquiring an interest in the domestic partnership after [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register] and wishes to have a section 1295 
election applicable with respect to the PFIC may make a section 1295 
election under paragraph (d)(2)(i)(A) of this section with respect to 
stock treated as owned by reason of its interest in the domestic 
partnership. A shareholder that is treated as owning stock of a QEF by 
reason of an interest in a domestic partnership that has made a 
preexisting partnership section 1295 election accounts for its pro rata 
share of the ordinary earnings and net capital gain attributable to 
such QEF stock as provided in Sec.  1.1293-1(c)(1).
    (ii) S corporation--(A) In general. If an S corporation holds stock 
of a PFIC, the section 1295 election with respect to such PFIC is made 
by a shareholder (as defined in paragraph (j)(3) of this section) 
indirectly owning the PFIC stock by reason of its interest in the S 
corporation. A section 1295 election made by a shareholder under this 
paragraph (d)(2)(ii)(A) applies to the stock of the PFIC held by the 
shareholder by reason of its interest in the S corporation and to any 
other stock of the PFIC held by the shareholder. A shareholder making 
an election under this paragraph (d)(2)(ii)(A) must do so in the form 
and manner provided in paragraph (f) of this section. The shareholder 
must also notify the S corporation of the election no later than 30 
days after filing the return in which the election is made; the 
shareholder may notify the S corporation in any reasonable manner. 
However, the failure of the shareholder to notify the S corporation of 
its election does not invalidate an otherwise valid election under this 
paragraph (d)(2)(ii)(A). A shareholder making an election under this 
paragraph (d)(2)(ii)(A) accounts for its pro rata share of ordinary 
earnings and net capital gain attributable to the QEF stock as provided 
in Sec.  1.1293-1(c)(1).
    (B) Preexisting section 1295 election by S corporation. Any section 
1295 election made by an S corporation with respect to a PFIC effective 
for taxable years of such PFIC ending on or before [date of publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register] (preexisting S corporation section 1295 election) 
will be treated as if it were made by each shareholder that is treated 
as owning stock in the PFIC by reason of its interest in the S 
corporation on or before such date, and the stock in the PFIC will 
continue to be treated as stock in a QEF to such shareholder; any S 
corporation shareholder that becomes a shareholder of the PFIC by 
acquiring an interest in the S corporation after [date of publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register] and wishes to have a section 1295 election 
applicable with respect to the PFIC may make a section 1295 election 
under paragraph (d)(2)(ii)(A) of this section with respect to stock 
treated as owned by reason of its interest in the S corporation. A 
shareholder that is treated as owning stock of a QEF by reason of an 
interest in an S corporation that has made a preexisting S corporation 
section 1295 election accounts for its pro rata share of the ordinary 
earnings and net capital gain attributable to the QEF stock as provided 
in Sec.  1.1293-1(c)(1).
* * * * *
    (f) * * *
    (2) * * * (i) In general. A shareholder that makes a section 1295 
election with respect to a PFIC, or a shareholder that is treated as 
owning stock in a QEF by reason of an interest in a domestic 
partnership that has made a preexisting partnership section 1295 
election (within the meaning of paragraph (d)(2)(i)(B) of this section) 
or by reason of an interest in an S corporation that has made a 
preexisting S corporation section 1295 election (within the meaning of 
paragraph (d)(2)(ii)(B) of this section), for each taxable year to 
which the section 1295 election applies, must--
* * * * *
    (3) Preexisting partnership or S corporation section 1295 election. 
A shareholder that is treated as owning stock in a QEF by reason of an 
interest in a domestic partnership that has made a preexisting 
partnership section 1295 election or by reason of an interest in an S 
corporation that has made a preexisting S corporation section 1295 
election does not need to make a section 1295 election with respect to 
such QEF under the rules of paragraph (f)(1) of this section. However, 
such shareholder must comply with the annual election requirements as 
provided in paragraph (f)(2) of this section.
    (4) Notice requirement for partners and S corporation shareholders. 
See paragraphs (d)(2)(i)(A) and (d)(2)(ii)(A) of this section for a 
notice requirement for partners and S corporation shareholders making a 
section 1295 election under this section.
* * * * *

[[Page 3917]]

    (j) Definitions. For purposes of this section--
    (1) Intermediary. The term intermediary means a nominee or 
shareholder of record that holds stock on behalf of the shareholder or 
on behalf of another person in a chain of ownership between the 
shareholder and the PFIC, and any direct or indirect beneficial owner 
of PFIC stock (including a beneficial owner that is a pass-through 
entity) in the chain of ownership between the shareholder and the PFIC.
    (2) Pass-through entity. The term pass-through entity means a 
partnership, S corporation, trust, or estate.
    (3) Shareholder. The term shareholder has the meaning provided in 
Sec.  1.1291-1(b)(7).
    (4) Shareholder's election year. The term shareholder's election 
year means the taxable year of the shareholder for which it makes the 
section 1295 election.
    (k) Applicability dates. * * * Paragraphs (b)(3), (d)(1), (d)(2)(i) 
and (ii), (f)(2)(i), (f)(3) and (4), and (j) of this section apply to 
taxable years of shareholders beginning on or after [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register]. For taxable years of shareholders 
beginning before [date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register], see Sec.  
1.1295-1(b)(3), (d)(1), (d)(2)(i) and (ii), (f)(2)(i), (i)(1)(ii), and 
(j) as in effect and contained in 26 CFR part 1, as revised April 1, 
2021.
0
Par. 11. Section 1.1296-1 is amended by:
0
1. Adding paragraph (a)(4);
0
2. Revising paragraph (e)(1);
0
3. Removing paragraph (g)(3);
0
4. Revising paragraphs (h)(1)(i) and (j); and
0
5. For each paragraph listed in the following table, removing the 
language in the ``Remove'' column and adding in its place the language 
in the ``Add'' column.

----------------------------------------------------------------------------------------------------------------
               Paragraph                           Remove                                Add
----------------------------------------------------------------------------------------------------------------
(b)(1).................................  United States person......  shareholder.
(b)(2), heading........................  United States person......  shareholder.
(b)(2), first sentence.................  United States person......  shareholder.
(b)(2), first sentence.................  U.S. person...............  shareholder.
(b)(2), second sentence................  United States person's....  shareholder's.
(b)(3), second sentence................  United States person's....  shareholder's.
(b)(3), second sentence................  person owns directly......  shareholder owns directly.
(c)(1).................................  United States person's....  shareholder's.
(c)(1).................................  United States person......  shareholder.
(c)(3).................................  United States person's....  shareholder's.
(c)(3).................................  such person...............  such shareholder.
(c)(5).................................  United States person......  shareholder.
(d)(1).................................  United States person......  shareholder.
(d)(2), heading........................  certain foreign entities..  pass-through entities.
(d)(2)(i), first and last sentences....  United States person......  shareholder.
(d)(2)(i), first sentence..............  certain foreign entities..  pass-through entities.
(d)(2)(i), first sentence..............  foreign entity............  entity.
(d)(2)(i), last sentence...............  United States person's....  shareholder's.
(e), heading...........................  foreign entities..........  pass-through entities.
(f)....................................  taxpayer..................  shareholder.
(f)....................................  taxpayer's................  shareholder's.
(g)(1).................................  United States person......  shareholder.
(g)(2), heading........................  United States person......  shareholder.
(g)(2)(i)..............................  United States person......  shareholder.
(h)(1)(ii).............................  controlling United States   controlling domestic shareholders.
                                          shareholders.
(h)(2)(ii), first sentence.............  United States person......  shareholder.
(h)(2)(ii), last sentence..............  United States person's....  shareholder's.
(h)(3)(i), first sentence..............  United States person's....  shareholder's.
(h)(3)(i), first sentence..............  United States person......  shareholder.
(h)(3)(ii), second sentence............  United States person......  shareholder.
(i)(1).................................  United States person's....  shareholder's.
(i)(1).................................  United States person......  shareholder.
(i)(2), introductory text..............  United States person......  shareholder.
(i)(2)(ii).............................  United States person's....  shareholder's.
(i)(2)(ii).............................  taxpayer's................  shareholder's.
----------------------------------------------------------------------------------------------------------------

    The addition and revisions read as follows:


Sec.  1.1296-1   Mark to market election for marketable stock.

    (a) * * *
    (4) Shareholder. The term shareholder has the meaning provided in 
Sec.  1.1291-1(b)(7).
* * * * *
    (e) * * * (1) In general. Except as provided in paragraph (e)(2) of 
this section, the following rules apply in determining stock ownership 
for purposes of this section. PFIC stock owned, directly or indirectly, 
by or for a partnership (domestic or foreign), S corporation, foreign 
trust (other than a foreign trust that is described in sections 671 
through 679), or foreign estate is considered as being owned 
proportionately by its partners, shareholders, or beneficiaries, 
respectively. PFIC stock owned, directly or indirectly, by or for a 
trust (domestic or foreign) described in sections 671 through 679 is 
considered as being owned proportionately by its grantors or other 
persons treated as owners under sections 671 through 679 of any portion 
of the trust that includes the stock. The determination of a person's 
proportionate interest in a partnership, S corporation, trust, or 
estate will be made on the basis of all the facts and circumstances. 
Stock considered owned by a person by reason of this paragraph

[[Page 3918]]

is treated as actually owned by such person for purposes of applying 
the rules of this section.
* * * * *
    (h) * * * (1) * * * (i) Shareholders. Except as otherwise provided 
in this paragraph (h), a shareholder (as defined in paragraph (a)(4) of 
this section) that owns marketable stock in a PFIC, or is treated as 
owning marketable stock under paragraph (e) of this section, on the 
last day of the shareholder's taxable year, must make a section 1296 
election for such taxable year on or before the due date (including 
extensions) of its income tax return for that year. The section 1296 
election must be made on the Form 8621, ``Return by a Shareholder of a 
Passive Foreign Investment Company or Qualified Electing Fund'' (or 
successor form), included with the original or superseding tax return 
of the shareholder for that year.
    (A) Preexisting section 1296 election. Notwithstanding paragraph 
(h)(1)(i) of this section, any section 1296 election with respect to a 
PFIC made by a domestic partnership or S corporation effective for 
taxable years of the PFIC ending on or before [date of publication of 
the Treasury decision adopting these rules as final regulations in the 
Federal Register] (preexisting section 1296 election) will continue to 
apply, and any stock in the PFIC that a shareholder is treated as 
owning by reason of its interest in the domestic partnership or S 
corporation on or before such date will continue to be treated as 
section 1296 stock to such shareholder; any person that becomes a 
shareholder of the PFIC by acquiring an interest in the domestic 
partnership or S corporation after such date that wishes for a section 
1296 election to apply with respect to the PFIC may make a section 1296 
election as provided in paragraphs (b)(1) and (h)(1)(i) of this 
section. A shareholder that is treated as owning section 1296 stock by 
reason of an interest in a domestic partnership or S corporation that 
has made a preexisting 1296 election under this paragraph (h)(1)(i)(A) 
accounts for its share, through its ownership in the domestic 
partnership or S corporation, of any mark to market gain recognized 
under paragraph (c)(1) of this section and any mark to market loss 
under paragraph (c)(3) of this section as if it owned the section 1296 
stock directly.
    (B) Notice. A shareholder that makes a section 1296 election with 
respect to section 1296 stock owned through a partnership or S 
corporation must notify the partnership or S corporation of the 
election no later than 30 days after filing the return in which the 
election is made; the shareholder may provide such notification in any 
reasonable manner. However, the failure of the shareholder to notify 
the partnership or S corporation of its election will not invalidate an 
otherwise valid section 1296 election.
* * * * *
    (j) Applicability date. Except as otherwise provided in this 
paragraph (j), the provisions in this section apply to taxable years 
beginning on or after May 3, 2004. The provisions of paragraph (d)(4) 
of this section relating to section 1022 apply on and after January 19, 
2017. The provisions of paragraphs (a)(4); (b)(1) through (3); (c)(1), 
(3), and (5); (d)(1) and (d)(2)(i); (e)(1); (f); (g)(1), (g)(2)(i), and 
(g)(3); (h)(1)(i) and (ii), (h)(2)(ii), and (h)(3)(i) and (ii); and 
(i)(1), (i)(2) introductory text, and (i)(2)(ii) apply to taxable years 
of shareholders beginning on or after [date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register]. For taxable years of shareholders beginning before 
[date of publication of the Treasury decision adopting these rules as 
final regulations in the Federal Register], see Sec.  1.1296-1(b)(1) 
through (3); (c)(1), (3), and (5); (d)(1) and (d)(2)(i); (e)(1); (f); 
(g)(1), (g)(2)(i), and (g)(3); (h)(1)(i) and (ii), (h)(2)(ii), and 
(h)(3)(i) and (ii); and (i)(1), (i)(2) introductory text, and 
(i)(2)(ii) as in effect and contained in 26 CFR part 1, as revised 
April 1, 2021.


Sec.  1.1297-0   [Amended]

0
Par. 12. Section 1.1297-0 is amended by removing the language ``section 
1297(e) PFIC'' from the heading for the entry for Sec.  1.1297-3 and 
adding ``section 1297(d) PFIC'' in its place.
0
Par. 13. Section 1.1297-3 is amended by:
0
1. Revising the section heading;
0
2. Removing the language ``section 1297(e)'' in paragraph (a) and 
adding ``section 1297(d)'' in its place;
0
3. Removing the language ``section 1297(e) PFIC'' in paragraphs (b)(1) 
and (2) and adding ``section 1297(d) PFIC'' in its place;
0
4. Removing the language ``section 1297(e)(2)'' in paragraph (b)(2) and 
adding ``section 1297(d)(2)'' in its place;
0
5. Removing the language ``section 1297(e) PFIC'' in paragraphs (c)(1) 
and (2) and adding ``section 1297(d) PFIC'' in its place;
0
6. Removing the language ``section 1297(e)(2)'' in paragraph (c)(2) and 
adding ``section 1297(d)(2)'' in its place;
0
7. Removing the language ``the post-1986 undistributed earnings, within 
the meaning of section 902(c)(1) (determined without regard to section 
902(c)(3))'' in paragraphs (c)(3)(i)(A) and (B) and adding ``the amount 
of the earnings and profits of the foreign corporation (computed in 
accordance with sections 964(a) and 986)'' in its place; and
0
8. Removing the language ``section 1297(e) PFIC'' in paragraphs (d) and 
(e)(1) and adding ``section 1297(d) PFIC'' in its place.
    The revision reads 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(d) PFIC.

* * * * *
0
Par. 14. Section 1.1298-1 is amended by:
0
1. Revising paragraphs (b)(1), (b)(2) heading, (b)(2)(i) introductory 
text, and (b)(2)(ii);
0
2. Removing paragraph (c)(6);
0
3. Redesignating paragraphs (c)(7) through (9) as paragraphs (c)(6) 
through (8), respectively;
0
4. Removing the language ``Except as provided in paragraph (h)(2) of 
this section'' in paragraph (h)(1) and adding ``Except as provided in 
paragraph (h)(2) or (3) of this section'' in its place;
0
5. Removing the language ``Paragraph (c)(9)'' in paragraph (h)(2) and 
adding ``Paragraph (c)(8)'' in its place; and
0
6. Adding paragraph (h)(3).
    The revisions and addition 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.

* * * * *
    (b) * * * (1) General rule. Except as otherwise provided in this 
section, a United States person that is a shareholder of a PFIC (as 
defined in Sec.  1.1291-1(b)(7)) 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 this section for the PFIC if, during the shareholder's 
taxable year, the shareholder--
    (i) Directly owns stock of the PFIC; or
    (ii) Is an indirect shareholder under Sec.  1.1291-1(b)(8) that 
holds any interest in the PFIC through one or more entities, domestic 
or foreign, each of which is not a shareholder of such PFIC within the 
meaning of Sec.  1.1291-1(b)(7).
    (2) Additional requirement to file for certain beneficiaries of 
domestic estates and domestic nongrantor trusts--(i) General rule. 
Except as otherwise provided in this section, an indirect shareholder 
that owns an interest in a PFIC by reason of an interest in a domestic 
estate or domestic nongrantor trust (as described in Sec.  1.1291-

[[Page 3919]]

1(b)(8)(iii)(C)) also must file Form 8621 (or successor form) with 
respect to the PFIC under section 1298(f) and this section if, during 
the indirect shareholder's taxable year, the indirect shareholder is--
* * * * *
    (ii) Exception to indirect shareholder reporting for certain QEF 
inclusions and MTM inclusions. The filing requirements under paragraph 
(b)(2)(i) 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 the domestic nongrantor trust or 
domestic estate 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) of this section.
* * * * *
    (h) * * *
    (3) Paragraphs (b)(1) and (b)(2)(i) and (ii) of this section apply 
to taxable years of shareholders beginning on or after [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register]. For taxable years of shareholders 
beginning before [date of publication of the Treasury decision adopting 
these rules as final regulations in the Federal Register], see Sec.  
1.1298-1(b)(1) and (b)(2)(i) and (ii) as in effect and contained in 26 
CFR part 1, as revised April 1, 2021.


Sec.  1.1298-3   [Amended]

0
Par. 15. Section 1.1298-3 is amended by removing the language ``the 
post-1986 undistributed earnings, within the meaning of section 
902(c)(1) (determined without regard to section 902(c)(3))'' in 
paragraph (c)(3)(i) and adding ``the amount of the earnings and profits 
of the foreign corporation (computed in accordance with sections 964(a) 
and 986)'' in its place.
0
Par. 16. Section 1.1411-10 is amended by:
0
1. Removing paragraph (g)(2)(iii);
0
2. Revising paragraph (g)(3);
0
3. Removing paragraph (g)(4)(ii);
0
4. Redesignating paragraphs (g)(4)(iii) and (iv) as paragraphs 
(g)(4)(ii) and (iii), respectively; and
0
5. Revising newly redesignated paragraph (g)(4)(iii) and paragraph (i).
    The revisions read as follows:


Sec.  1.1411-10   Controlled foreign corporations and passive foreign 
investment companies.

* * * * *
    (g) * * *
    (3) Who may make the election--(i) In general. An individual, 
estate, or trust may make an election under paragraph (g) of this 
section with respect to each CFC or QEF that it holds directly or 
indirectly through one or more entities, each of which is a foreign 
entity or a domestic pass-through entity. The election, if made, for an 
estate or trust must be made by the fiduciary of the estate or trust.
    (ii) Special rule for certain S corporations. For taxable years in 
which an S corporation elects to apply Sec.  1.958-1(e), the S 
corporation may make an election under this paragraph (g)(3)(ii) with 
respect to each CFC that it holds, directly or indirectly. If an S 
corporation does not make the election under this paragraph (g)(3)(ii), 
the election may be made by its shareholders that are individuals, 
estates, or trusts instead.
    (4) * * *
    (iii) Time for making election. The election under paragraph (g) of 
this section must be made in the manner prescribed by forms, 
instructions, or in other guidance on the individual's, estate's, or 
trust's original or amended return for the taxable year for which the 
election is made. An election can be made on an amended return only if 
the taxable year for which the election is made, and all taxable years 
that are affected by the election, are not closed by the period of 
limitations on assessments under section 6501. Extensions of time to 
make the election are not available under any other provision of the 
law, including Sec.  301.9100 of this chapter.
* * * * *
    (i) Applicability dates. Except as otherwise provided in this 
paragraph (i), this section applies to taxable years beginning after 
December 31, 2013. However, taxpayers may apply this section to taxable 
years beginning after December 31, 2012, in accordance with Sec.  
1.1411-1(f). Paragraphs (g)(3) and (g)(4)(iii) of this section apply to 
taxable years beginning on or after [date of publication of the 
Treasury decision adopting these rules as final regulations in the 
Federal Register]. For taxable years beginning before [date of 
publication of the Treasury decision adopting these rules as final 
regulations in the Federal Register], see paragraphs (g)(3) and 
(g)(4)(iii) of this section as in effect and contained in 26 CFR part 
1, as revised April 1, 2021.

Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2022-00067 Filed 1-24-22; 8:45 am]
BILLING CODE 4830-01-P