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Bulletin No. 1998–8
February 23, 1998

Internal Revenue

bulletin
HIGHLIGHTS
OF THIS ISSUE

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX

ADMINISTRATIVE

T.D. 8750, page 4.
REG–115795–97, page 33.

REG–100841–97, page 30.

Temporary and proposed regulations provide guidance to a
passive foreign investment company (PFIC) shareholder that
makes the election under section 1295 of the Code to treat
the PFIC as a qualified electing fund. A public hearing on the
proposed regulations will be held on April 16, 1998.

Rev. Proc. 98–21, page 27.
Procedures concerning requests to the U.S. competent authority for assistance in resolving cases under Article XIII(8)
of the U.S.—Canada Income Tax Convention are set forth.

EMPLOYEE PLANS
REG–209476–82, page 36.
Proposed regulations under section 72(p) of the Code relate
to loans made from a qualified employer plan to plan participants or beneficiaries.

EXEMPT ORGANIZATIONS
Announcement 98–11, page 42.
A list is given of organizations now classified as private foundations.

EMPLOYMENT TAX
REG–209484–87; REG–209807–95, page 40.
Proposed regulations under sections 3121(v)(2) and
3306(r)(2) of the Code relate to when amounts deferred
under or paid from certain nonqualified deferred compensation plans are taken into account as “wages” for purposes of
the taxes imposed by FICA and FUTA.

EXCISE TAX
T.D. 8748, page 24.

Proposed regulations under section 6159 of the Code relate
to terminations of agreements for the payment of tax liabilities in installments (installment agreements).

REG–105163–97, page 31.
Proposed regulations relate to the treatment of certain investment income under the qualifying income provisions of
section 7704(d) of the Code and the application of the passive activity loss rules to publicly traded partnerships. A public hearing will be held on April 28, 1998.

Notice 98–14, page 27.
Failure to deposit federal tax; penalty abatement. An
interim procedure is provided for use by taxpayers to request abatement of the failure-to-deposit penalty when the
manner in which the Service applies deposits produces multiple failure-to-deposit penalties as a result of a single failure
to deposit.

Announcement 98–12, page 43.
This announcement provides guidance on how to complete
the worksheets for Form 8582, Passive Activity Loss Limitations, if the filer has more than one passive activity with
Schedule D (Form 1040) transactions.

Announcement 98–13, page 43.
Form 3115, Application for Change in Accounting Method,
and its instructions have been revised.

Announcement 98–14, page 44.
Form 5305–R, Roth Individual Retirement Trust Account;
Form 5305–RA, Roth Individual Retirement Custodial Account; Form 5305–E, Education Individual Retirement Trust
Account; and Form 5305–EA, Education Individual Retirement Custodial Account, are now available.

Final regulations under section 4081 of the Code relate to the
application of the diesel fuel excise tax to fuel used in Alaska.
Finding Lists begin on page 48.
Announcement of Disbarments and Suspensions begins on page 45.

Department of the Treasury
Internal Revenue Service

Mission of the Service
ucts and services; and perform in a manner warranting
the highest degree of public confidence in our integrity, efficiency, and fairness.

The purpose of the Internal Revenue Service is to collect
the proper amount of tax revenue at the least cost; serve
the public by continually improving the quality of our prod-

Statement of Principles
of Internal Revenue
Tax Administration
The Service also has the responsibility of applying and
administering the law in a reasonable, practical manner.
Issues should only be raised by examining officers when
they have merit, never arbitrarily or for trading purposes.
At the same time, the examining officer should never hesitate to raise a meritorious issue. It is also important that
care be exercised not to raise an issue or to ask a court to
adopt a position inconsistent with an established Service
position.

The function of the Internal Revenue Service is to administer the Internal Revenue Code. Tax policy for raising revenue
is determined by Congress.
With this in mind, it is the duty of the Service to carry out that
policy by correctly applying the laws enacted by Congress;
to determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them;
and to perform this work in a fair and impartial manner, with
neither a government nor a taxpayer point of view.

Administration should be both reasonable and vigorous. It
should be conducted with as little delay as possible and
with great courtesy and considerateness. It should never
try to overreach, and should be reasonable within the
bounds of law and sound administration. It should, however, be vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax devices and
fraud.

At the heart of administration is interpretation of the Code. It
is the responsibility of each person in the Service, charged
with the duty of interpreting the law, to try to find the true
meaning of the statutory provision and not to adopt a
strained construction in the belief that he or she is “protecting the revenue.” The revenue is properly protected only
when we ascertain and apply the true meaning of the statute.

2

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold
on a single-copy basis.

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.

Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemaking
and the disbarment and suspension list included in this part,
none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis
and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 1295.—Qualified
Electing Fund
26 CFR 1.1295–1T: Qualified electing funds
(temporary).

T.D. 8750

1.1293–1T(c)(3), 1.1295–1T(k), 1.1295–
3T(h), and § 1.1297–3T(c)(3) of these
regulations.
FOR FURTHER INFORMATION CONTACT: Gayle Novig, (202) 622-3840
(not a toll-free number).
SUPPLEMENTARY INFORMATION:

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
General Rules for Making and
Maintaining Qualified Electing
Fund Elections
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Temporary and final regulations.
SUMMARY: This document contains
temporary regulations that provide guidance to a passive foreign investment company (PFIC) shareholder that makes the
election under section 1295 (section 1295
election) to treat the PFIC as a qualified
electing fund (QEF). This document also
contains temporary regulations that provide guidance for shareholders that wish
to make a section 1295 election that will
apply on a retroactive basis (retroactive
election). In addition, this document contains a temporary regulation that provides
guidance under section 1291 to a PFIC
shareholder that is a tax-exempt organization. Temporary regulations are needed to
provide taxpayers additional time to satisfy certain requirements to make the section 1295 election. The text of these temporary regulations also serves as the text
of proposed regulations REG–115795–
97, page 33. In addition, this document
removes § 1.1291–9(i)(1) of the final regulations, and amends § 1.1297– 3T. References to sections 1296 and 1297 in this
document are references to sections 1296
and 1297 as in effect before the effective
date of section 1122(a) of the Tax Relief
Act of 1997.
DATES: These regulations are effective
January 2, 1998.
For dates of applicability, see
§§ 1.1291–1T(e)(2), 1.1293–1T(a)(2)(ii),

February 23, 1998

Paperwork Reduction Act
These regulations are being issued
without prior notice and public procedure
pursuant to the Administrative Procedure
Act (5 U.S.C. 553). For this reason, the
collections of information contained in
these regulations have been reviewed and,
pending receipt and evaluation of public
comments, approved by the Office of
Management and Budget under control
number 1545–1555. Responses to these
collections of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
control number.
For further information concerning
these collections of information, and
where to submit comments on the collections of information and the accuracy of
the estimated burden, and suggestions for
reducing this burden, please refer to the
preamble to REG–115795–97.
Books or records relating to a collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
This document contains amendments to
the Income Tax Regulations (26 CFR part
1) under sections 1291, 1293, 1295, and
1297 of the Internal Revenue Code. Sections 1291, 1293, 1295, and 1297 were
added by the Tax Reform Act of 1986, effective for taxable years of foreign corporations beginning after December 31,
1986. As originally enacted, the section
1295 election was an election made by the
PFIC. The Technical and Miscellaneous
Revenue Act of 1988 (TAMRA) amended
section 1295, effective for taxable years

4

of foreign corporations beginning after
December 31, 1986, to change the section
1295 election to a shareholder-by-shareholder election. Sections 1291, 1293, and
1297 also were amended by TAMRA;
sections 1293 and 1297 were further
amended by the Omnibus Budget Reconciliation Act of 1993. Section 1297 also
was amended by the Revenue Reconciliation Act of 1989 and the Small Business
Job Protection Act of 1996. In addition,
the Taxpayer Relief Act of 1997 (1997
TRA) amended section 1 to provide categories of long-term capital gain and the
maximum rates of tax to which the categories are subject. In certain cases, this
amendment affects the calculation of net
capital gain for purposes of section 1293.
Guidance for making the election under
section 1295 was first provided on March
2, 1988, in the Federal Register (53 F.R.
6770), with the publication of temporary
regulations (T.D. 8178) relating to the
section 1295 election. These temporary
regulations provided guidance to PFICs
making the section 1295 election and
therefore became obsolete with the 1988
amendment to section 1295. The Internal
Revenue Service published Notice 88–
125, 1988–2 C.B. 535, to provide guidance to shareholders making the section
1295 election under section 1295, as
amended. Notice 88–125 was an administrative pronouncement, as that term is
used in § 1.6661–3(b)(2) of the Income
Tax Regulations, and taxpayers could rely
on Notice 88–125 to the same extent as a
revenue ruling or a revenue procedure.
Notice 88–125 stated that taxpayers could
rely on the notice until regulations were
published, and that those regulations
would be effective for taxable years beginning after December 31, 1986.
Proposed regulations published April 1,
1992 (57 F.R. 11024), provide a general
rule regarding the application of section
1291 to a PFIC shareholder that is an organization exempt from tax under chapter
1. In addition, these proposed regulations
provide general rules regarding the application of section 1293 and special rules
regarding the application of section 1295,
including rules with respect to transfers of
PFIC stock subject to a section 1295 election. Proposed regulation § 1.1295–2,
published December 24, 1996 (61 F.R.

1998–8 I.R.B.

67752), permits certain shareholders to
make a special section 1295 election with
respect to certain preferred stock. Proposed regulation § 1.1293–2, also published December 24, 1996 (61 F.R.
67752), provides the special inclusion
rules applicable to shareholders that make
the special section 1295 election with respect to their preferred stock.
Temporary regulations § 1.1297–3T,
published March 2, 1988 (53 F.R. 6770),
provides guidance for making the deemed
sale election under section 1297(b)(1) to
purge the PFIC taint from stock of a foreign corporation that is treated as stock of
a PFIC under section 1297(b)(1). Section
1.1291–9(i)(1) of the regulations, published December 27, 1996 (61 F.R.
68149), provides that the deemed dividend election rules of § 1.1291–9 do not
apply to elections made under section
1297(b)(1). A similar rule had been provided in temporary regulations published
April 1, 1992 (57 F.R. 10992). The temporary regulations, which had been effective April 1, 1992, sunset April 1, 1995.
Treasury and the Service believe that
immediate guidance in the form of temporary regulations regarding the section
1295 election is necessary. First, the regulations provide significant new QEF
election procedures that are beneficial to
taxpayers. For example, the regulations
provide procedures for both retroactive
and protective elections. The benefits
provided by these changes may be jeopardized, or simply unavailable (as a result
of closed taxable years), if taxpayers cannot immediately rely on them. Second,
although the regulations embody guidance already provided in Notice 88–125,
the regulations significantly reduce the
burden for making and maintaining the
election and clarify, most often in favor of
taxpayers, significant ambiguities left by
the Notice. Treasury and the Service believe that the benefits of immediate guidance significantly outweigh any advantage obtained by issuing the regulations in
proposed form only because these temporary regulations prevent prejudice to taxpayers as a consequence of a further delay
in guidance and because they benefit taxpayers by providing additional time to
make certain elections. Finally, the temporary regulations provide guidance concerning the manner in which section 1(h),
which was added to the Code by 1997

1998–8 I.R.B

TRA, effective for taxable years ending
after May 6, 1997, applies to determine
the net capital gain of the PFIC and the
QEF shareholder’s pro rata share of the
net capital gain. Therefore, it would be
impractical and contrary to public interest
to issue this Treasury decision with prior
notice under section 553(b) of title 5 of
the United States Code.
Explanation of Provisions
A foreign corporation is a passive foreign investment company (PFIC) for a
taxable year if the foreign corporation satisfies either the income or asset test of
section 1296(a) for that year. A foreign
corporation is a PFIC under the income
test if 75 percent or more of its gross income for its taxable year is passive, or investment-type, income. Alternatively,
under the asset test, a foreign corporation
is a PFIC if 50 percent or more of the average fair market value of its assets during
its taxable year are assets that produce or
are held for the production of passive income. A shareholder of a foreign corporation that qualifies as a PFIC is subject to
the interest charge regime of section 1291
with respect to certain distributions by the
PFIC and certain dispositions of its stock.
Generally, a shareholder may avoid the
interest charge regime by making a timely
election under section 1295 to treat a
PFIC as a QEF, in which case the shareholder will be taxable annually under section 1293 on its pro rata shares of the ordinary earnings and net capital gain of the
PFIC. Under section 1295(a), a section
1295 election will apply with respect to
the PFIC if the PFIC complies with requirements prescribed by the Secretary
for purposes of determining the ordinary
earnings and net capital gain of the PFIC
and otherwise carrying out the purposes
of the PFIC provisions.
Section 1295(b)(1) provides that a
shareholder may make a section 1295
election with respect to a PFIC for any
taxable year of the shareholder (shareholder election year). Once made, the
election will apply to that year and to all
subsequent years of the shareholder unless revoked with the consent of the Secretary. Section 1295(b)(2) prescribes the
time for making the election. In general,
for the section 1295 election to be applicable to a taxable year, the shareholder

5

must make the election by the due date, as
extended under section 6081, for the
shareholder’s return for that taxable year.
However, to the extent provided in regulations, a section 1295 election may be
made for a taxable year after the time required if the shareholder failed to make a
timely election because the shareholder
reasonably believed that the foreign corporation was not a PFIC.
This document provides temporary regulations that interpret sections 1291,
1293, 1295, and 1297. In particular, the
temporary regulations incorporate the
rules of Notice 88–125, with certain modifications. The temporary regulations also
clarify the rules of the notice and proposed regulation § 1.1295–1(b) with respect to the application of section 1295 to
options, lapse of PFIC status, cessation of
ownership of PFIC stock, transfer of
stock subject to a section 1295 election to
a pass through entity, and tax-exempt organizations. The temporary regulations
also provide rules regarding invalidation,
termination and revocation of a section
1295 election. In addition, the temporary
regulations introduce rules for making a
retroactive election. Finally, the temporary regulations provide guidance concerning the application of the deemed dividend election rules to elections under
section 1297(b)(1).
1. Rules of Notice 88–125.
Temporary regulation § 1.1295–1T(c)
through (g) adopts the rules provided in
Notice 88–125, with certain modifications. These modifications reflect certain
comments received with respect to the notice.
Notice 88–125 describes the requirements a shareholder must satisfy to make
and maintain a section 1295 election. In
particular, each year the shareholder must
file Form 8621 with its income tax return
and attach a PFIC Annual Information
Statement (described below). In the year
of election, the shareholder also must attach a Shareholder Election Statement.
Notice 88–125 requires satisfaction of the
election and annual reporting requirements with respect to each PFIC for
which the shareholder makes the section
1295 election.
Commenters indicated that these election and annual reporting requirements

February 23, 1998

are burdensome, especially if the shareholder is making the election with respect
to many foreign corporations. In response
to the comments, the temporary regulations change these requirements to reduce
the burden on the electing shareholder.
First, the temporary regulations eliminate
the need to file a Shareholder Election
Statement. Second, the temporary regulations eliminate the need to file a copy of
the PFIC Annual Information Statement
with Form 8621 and require instead that
the shareholder retain a copy of the PFIC
Annual Information Statement for production upon examination by the Service.
Thus, to make and maintain a section 1295
election, the shareholder need only file
Form 8621 for each PFIC on an annual
basis and maintain records to support the
information entered on that form.
Notice 88–125 imposes certain requirements on PFICs and on intermediaries
through which shareholders own PFIC
stock. The notice requires a PFIC to provide its shareholders with a PFIC Annual
Information Statement containing information necessary to determine each
shareholder’s yearly income inclusion. In
the case of indirect ownership of PFIC
stock, a nominee or shareholder of record
that has received a PFIC Annual Information Statement may issue its own statement to the shareholder containing the
relevant information in lieu of passing on
the PFIC Annual Information Statement.
The temporary regulations allow PFICs
and intermediaries more flexibility in fulfilling these requirements. A PFIC that
owns directly or indirectly any shares of
one or more PFICs may provide its shareholders with a PFIC Annual Information
Statement in which it combines the required information and representations of
the PFIC and any lower tier PFICs. The
PFIC may use any format for a combined
PFIC Annual Information Statement provided the required information and representations are clearly presented and identified with the respective corporations.
Similarly, an intermediary through which
a shareholder indirectly holds stock in
more than one PFIC may provide the
shareholder a combined statement based
on multiple PFIC Annual Information
Statements. Comments are requested
concerning alternative reporting methods
that could further reduce the burden on
electing shareholders.

February 23, 1998

As provided in Notice 88–125, the
PFIC Annual Information Statement must
include the shareholder’s pro rata shares
of the ordinary earnings and net capital
gain of the PFIC for the PFIC’s taxable
year or information that will enable the
shareholder to calculate its pro rata
shares. In addition, the PFIC Annual Information Statement must contain information about distributions to shareholders
and a statement that the PFIC will permit
the shareholder to inspect and copy its
permanent books of account, records, and
other documents of the PFIC necessary to
determine that the ordinary earnings and
net capital gain of the PFIC have been
calculated according to federal income
tax accounting principles. Commenters
indicated that it was unclear in the notice
whether a shareholder, rather than the
PFIC, could calculate the requisite federal
income tax information with respect to a
PFIC that did not keep its books and
records according to U.S. tax accounting
rules. In response to the comments, the
temporary regulations clarify that a shareholder may obtain the books, records and
other documents of the foreign corporation necessary for the shareholder to determine the correct earnings and profits
and net capital gain of the PFIC according
to federal income tax principles and calculate the shareholder’s pro rata shares of
the PFIC’s ordinary earnings and net capital gain. The temporary regulations provide that, in that case, the PFIC must include a statement in its PFIC Annual
Information Statement that it has permitted the shareholder to examine the PFIC’s
books of account, records, and other documents necessary for the shareholder to
calculate the amounts of ordinary earnings and net capital gain.
Notice 88–125 provides that a domestic
partnership makes the section 1295 election rather than each individual partner
that is an indirect shareholder of the PFIC
by reason of the partner’s interest in the
partnership. The notice also provides that
an S corporation makes the section 1295
election. This entity-level election in the
case of domestic partnerships and S corporations reflects the view that multiple
elections by the partners or S corporation
shareholders would be more burdensome
than the single entity-level election. The
temporary regulations adopt the rules of
the notice with respect to elections by do-

6

mestic pass through entities, clarifying
that the section 1295 election with respect
to stock owned directly or indirectly by a
domestic trust or estate generally is also
made at the entity level. The temporary
regulations also adopt the rules of the notice with respect to interests held by foreign pass through entities. Interest holders in foreign partnerships, trusts, and
estates must make the section 1295 election with respect to their indirect interests
in PFICs held through those entities; foreign entities may not make the section
1295 election.
Partnerships, S corporations, trusts, and
estates are referred to as pass through entities in the temporary regulations. The
regulations clarify that an election made
by a domestic pass through entity is made
in the pass through entity’s capacity as a
shareholder, as specially defined in temporary regulation § 1.1295–1T(j) for purposes of the section 1295 election provisions. Thus, the domestic pass through
entity takes the section 1293 inclusion
into account in its return for the year in
which or with which the PFIC’s taxable
year ends, and the interest holders in the
pass through entity take the section 1293
inclusion into account under the rules applicable to inclusions of income from the
pass through entity. In addition, the temporary regulations clarify that if an interest holder in a domestic pass through entity transfers stock of a PFIC subject to a
section 1295 election to the pass through
entity, the section 1295 election continues
to apply to the interest holder whether or
not the pass through entity makes the section 1295 election.
Similarly, the temporary regulations
clarify the effect of the termination under
section 708(b) of a partnership on a section 1295 election made by the partnership. Section 1.1295–1T(b)(3)(iii) provides that, notwithstanding the
termination of a section 1295 election
when a partnership terminates, the partners of the former partnership that are
partners of the new partnership are bound
by the section 1295 election made by the
former partnership whether or not the new
partnership makes a section 1295 election.
Notice 88–125 does not provide any
special rules concerning tax-exempt entities. As provided in proposed regulations
under section 1291 (see Regulation Project INTL–656–87, published at 1992–1

1998–8 I.R.B.

C.B. 1124), section 1291 and the regulations under section 1291 apply to a taxexempt organization that is a shareholder
of a PFIC that is not a pedigreed QEF,
within the meaning of §1.1291–9(j)(2)(ii),
only if a dividend from the PFIC would
be taxable to the organization under subchapter F. Section 1.1291–1T(e) of these
temporary regulations provides the same
rule. To prevent such a tax-exempt organization from being subject to an unnecessary section 1295 election that may
have adverse consequences to the tax-exempt entity (e.g., an excise tax on gross
investment income of a private foundation that arises as a consequence of a section 1295 election), the temporary regulations provide a rule that precludes a
tax-exempt entity that is not taxable with
respect to dividends from a PFIC from
making a section 1295 election with respect to that PFIC or from being subject
to a pass through entity level election.
Commenters indicated that Notice
88–125 is unclear about which taxable
year of the PFIC is the first taxable year to
which the section 1295 election applies.
Temporary regulation § 1.1295–1T(c)(2)
clarifies that the section 1295 election is
effective with respect to the taxable year
of the foreign corporation that ends during
the shareholder’s election year. Because
certain shareholders may have misinterpreted Notice 88–125, the Commissioner
will respect a section 1295 election made
prior to February 1, 1998, that was intended to be effective for the taxable year
of the PFIC that began during the shareholder’s election year provided that it is
clear from all the facts and circumstances
that the shareholder intended the election
to be effective for that taxable year of the
foreign corporation. For example, a calendar year shareholder that made the section
1295 election in its 1995 return with respect to a foreign corporation whose taxable year began in 1995 and ended in
1996, with the intention that the election
first apply to the foreign corporation’s taxable year ended in 1996, will be treated as
having made a valid section 1295 election
with respect to that year.
2. Additional Clarifications.
A. Options.
Options with respect to PFIC stock present unique problems under section 1295.

1998–8 I.R.B

Section 1297(a)(4) provides that, under
regulations, an option to acquire stock
may be treated as ownership of stock.
Proposed regulations under section
1291 (see Regulation Project INTL–656–
87, published in 1992–1 C.B. 1124) provide that options are treated like stock for
purposes of section 1291. Under proposed
regulation § 1.1291–1(d), an option is
considered to be stock of a PFIC that is
not a pedigreed QEF for purposes of applying section 1291 to a disposition of the
option, unless the holder of the actual
stock which is subject to the option is currently including income from the stock
under section 1293. Under proposed regulation § 1.1291–1(h)(3), the holding period of stock acquired upon exercise of an
option treated as stock under § 1.1291–
1(d) includes the period the option was
held. These rules recognize that the value
of an option is linked to the value of the
underlying stock and therefore such an option should be subject to the PFIC rules.
Because of the potential for application
of section 1291 to options or stock acquired upon exercise of options, some option holders have requested that regulations provide rules for making a section
1295 election with respect to an option.
Application of a section 1295 election and
the section 1293 current inclusion regime
to options would present serious computational issues and would be administratively burdensome. Therefore, the temporary regulations continue the rule that any
shareholder’s section 1295 election with
respect to stock of a PFIC does not apply
to options to acquire stock of the PFIC
and that an option holder may not make a
section 1295 election with respect to the
optioned stock. Accordingly, if a shareholder of stock subject to a section 1295
election exercises an option to purchase
additional shares of stock of that PFIC,
the stock received will be subject to the
section 1295 election made by the shareholder, but, because of the rules of proposed regulation § 1.1291–1(h)(3), the
stock may be treated as stock of an unpedigreed QEF.
Comments are requested concerning
the option rule. In particular, comments
are requested that identify any administratively feasible mechanisms that would
permit a shareholder to make a section
1295 election that will apply to options.

7

B. Section 1295 Election Made in a
Joint Return.
Section 1.1295–1T(b)(4) of the temporary regulations clarifies the application
of a section 1295 election made in a joint
return within the meaning of section
6013. The temporary regulations provide
that a section 1295 election made in a
joint return will be treated as having been
made by both spouses that join in the filing of that return.
C. Lapse in PFIC Status or in
Ownership.
Section 1.1295–1T(c)(2) of the temporary regulations clarifies the status of a
shareholder’s section 1295 election with
respect to a foreign corporation after the
foreign corporation ceases to be a PFIC
and a QEF, or after the shareholder ceases
to be a shareholder of the PFIC. In general, once a section 1295 election is made
with respect to a corporation, it remains in
effect, although not applicable, during
those years that the foreign corporation is
not a PFIC. Therefore, if the corporation
requalifies as a PFIC, the section 1295
election previously made is still valid, and
the shareholder is required to satisfy the
requirements of that election. Furthermore, as indicated in H.R. No. 795, 100th
Cong., 2d Sess., at 567 (1988), an election
remains in effect with respect to a shareholder, although dormant, after a shareholder disposes of its entire interest in the
PFIC. Upon the shareholder’s reacquisition of an interest in the PFIC, the section
1295 election will apply to the newly acquired stock.
D. Invalidation, Termination, and
Revocation of Section 1295
Elections.
As provided in temporary regulation
§ 1.1295–1T(i)(1), the Commissioner has
discretion to invalidate or terminate a section 1295 election if the shareholder or
the QEF fails to satisfy the section 1295
election requirements. However, intentional failure to satisfy the section 1295
election requirements will not automatically result in invalidation or termination.
If the Commissioner invalidates a section
1295 election, the shareholder will be
treated as if it never made a section 1295
election with respect to the PFIC. If the
Commissioner terminates a section 1295
election for a taxable year, the section

February 23, 1998

1295 election will be valid for all taxable
years before that year, but inapplicable to
that year and all subsequent taxable years.
Once a shareholder makes a section
1295 election, the shareholder may revoke its section 1295 election only with
the consent of the Commissioner. Temporary regulation § 1.1295–1T(i)(2) provides the rules for requesting consent to
revoke an election.
The effects of an invalidation, termination, or revocation of a section 1295 election are provided in § 1.1295–1T(i)(3) of
the temporary regulations. In the Commissioner’s discretion, stock of a foreign
corporation, with respect to which the section 1295 election is invalidated, terminated, or revoked will be treated as sold as
of the last day of the PFIC’s last taxable
year as a QEF. The Commissioner also
has the discretion to impose any other
terms and conditions that the Commissioner deems necessary to ensure a shareholder’s compliance with sections 1291
through 1297. In addition, revocation will
terminate all section 1294 elections.
Section 1.1295–1T(i)(4) of the temporary regulations permits a shareholder to
make another section 1295 election with
respect to the PFIC after the fifth taxable
year following the invalidation, termination, or revocation. However, the shareholder may request consent to make the
section 1295 election for an earlier taxable year.
3. Section 1293.
The temporary regulations provide
guidance to PFICs concerning the application of section 1(h) to section 1293 and
the calculation of net capital gain. Section 1.1293–1T(a)(2) of the temporary
regulations provides three alternatives for
a QEF to calculate and report net capital
gain. First, the PFIC may calculate and
report to its shareholders the amount of
each category of long-term capital gain
provided in section 1(h). Alternatively,
the PFIC may determine and report a single amount of net capital gain, stating that
that amount of long-term capital gain is
subject to the highest capital gain rate of
tax applicable to the shareholder. Under
the third option, the PFIC may treat the
total of its earnings and profits for the taxable year as ordinary earnings. The provision of these options is intended to simplify compliance with the requirements of

February 23, 1998

sections 1293 and 1295. It is anticipated
that, without providing these options,
some PFICs would not be willing or able
to calculate the categories of net capital
gain required by section 1(h) and therefore would not provide the information
necessary for a QEF shareholder to maintain a valid section 1295 election. A
shareholder that has access to information
necessary to calculate its pro rata share of
the PFIC’s ordinary earnings and net capital gain may also use any of these options.
The Service requests comments about
how net capital gain should be calculated,
especially in light of the 1997 Act
changes to section 1.
The temporary regulations under section 1293 also clarify the application of
the current inclusion rules of section 1293
to interests in a QEF held through a domestic pass through entity. The temporary regulations provide generally that a
U.S. person that is a shareholder of the
QEF by reason of an interest in a domestic pass through entity takes into account
its pro rata shares of the ordinary earnings
and net capital gain of the QEF attributable to the QEF shares held by the pass
through entity according to the general
rules applicable to inclusions of income
from the pass through entity.

§ 1.1295–1T(c) through (j) will apply to
taxable years of shareholders beginning
after December 31, 1997. As provided in
§ 1.1295–1T(h), the Internal Revenue
Service will honor taxpayer reliance on
Notice 88–125 for taxable years beginning after December 31, 1986, and before
January 1, 1998. Thus, if a person made a
valid section 1295 election under the rules
of Notice 88–125 for taxable years beginning before January 1, 1998, and, for
those taxable years, complied with the
rules of the notice relating to maintaining
that election, the election remains in effect for taxable years beginning after December 31, 1997. However, elections
made under Notice 88–125, as well as
elections made under these temporary
regulations, must be maintained as provided in the temporary regulations.
Temporary regulation § 1.1291–1T(e)
will apply on and after April 1, 1992.
Section 1.1293–1T(a)(2) of the temporary
regulations will apply to sales by QEFs
during their taxable years ending on or
after May 7, 1997. Temporary regulation
§§ 1.1293–1T(c) and 1.1295–1T(b)(2)(iii), (b)(3), and (b)(4) will apply to taxable years of shareholders beginning after
December 31, 1997.
6. Retroactive Section 1295 Elections.

4. Exempt organizations subject to
section 1291.
As stated above, the temporary regulations include the rule of proposed regulation § 1.1291–1(e). Under temporary regulation § 1.1291–1T(e), if the shareholder
of a PFIC is an organization exempt from
tax under this chapter (including an Individual Retirement Account (IRA)), section 1291 and these regulations apply to
such shareholder only if a dividend from
the PFIC would be taxable to the organization under subchapter F.
5. Effective Dates of Temporary
Regulations §§ 1.1291–1T(e),
1.1293–1T(a)(2), 1.1293–1T(c) and
1.1295–1T.
As stated above, Notice 88–125 provides that the notice’s rules will be provided in regulations applicable to taxable
years beginning after 1986. However, because the temporary regulations do not
adopt the rules of Notice 88–125 in their
entirety, the temporary regulations will
not be retroactively applied. Therefore,

8

a. In General.
Section 1295(b)(2) provides that, to the
extent provided in regulations, a shareholder may make a section 1295 election
with respect to a foreign corporation later
than the election due date if the shareholder failed to make a timely section
1295 election because the shareholder
reasonably believed that the foreign corporation was not a PFIC. In temporary
regulation § 1.1295–3T, Treasury and the
Service interpret section 1295(b)(2) to
permit a shareholder of a PFIC to make a
retroactive election in certain limited circumstances where the shareholder possessed reasonable belief that the corporation was not a PFIC or the shareholder
demonstrates that it reasonably relied on
the advice of a qualified tax professional.
As described below, the temporary regulations set forth two distinct sets of rules
for making a retroactive election. Under
the first set of rules, a shareholder of a
PFIC that meets certain conditions may
make a retroactive election without obtaining the consent of the Commissioner

1998–8 I.R.B.

(protective regime). A shareholder may
make a retroactive election under the protective regime only if the shareholder possessed reasonable belief as of the election
due date that the foreign corporation was
not a PFIC. A shareholder of a PFIC may
make a retroactive election under the protective regime even after the issue of
PFIC status has been raised in an audit by
the Service.
Under the second set of rules, a shareholder may make a retroactive election
only after obtaining the Commissioner’s
consent (consent regime). To make a
retroactive election under the consent
regime, the shareholder must demonstrate, to the satisfaction of the Commissioner, that the shareholder’s failure to
make a timely section 1295 election resulted from the shareholder’s reasonable
reliance on the advice of a qualified tax
professional. A shareholder of a PFIC
may not make a retroactive election under
the consent regime unless the shareholder
files a request for consent before the issue
of PFIC status is raised on audit.
The temporary regulations provide the
exclusive rules for making a retroactive
election. Thus, a shareholder that does
not satisfy the requirements of the temporary regulations may not seek relief under
any other provision of the law, including
§ 301.9100 regulations. Although such a
shareholder may not make a retroactive
election, the shareholder may be able to
attain certain benefits associated with a
retroactive election by making a section
1295 election for the current year together
with a purging election under section
1291(d)(2).
b. Protective Regime.
A shareholder that satisfies the requirements of the protective regime may make
a retroactive election under the rules of
temporary regulation § 1.1295–3T(c)
through (e) without obtaining the Commissioner’s consent. This regime requires
that the shareholder possess reasonable
belief, contemporaneous with the election
due date, that the foreign corporation was
not a PFIC.
The legislative history of section 1295
suggests that in certain circumstances a
shareholder that reasonably believed that
a foreign corporation was not a PFIC for a
taxable year (e.g., based on a reasonable
valuation of the corporation’s assets) may

1998–8 I.R.B

make a retroactive election if the Service
determines, upon examination, that the
corporation was in fact a PFIC for such
taxable year (e.g., based on the Service’s
valuation of the corporation’s assets for
the taxable year). Consistent with the legislative history, temporary regulation
§ 1.1295–3T(c) through (e) permits a
shareholder to make a retroactive election
for a taxable year of the shareholder
(retroactive election year), even if the
Service raises the PFIC status of the corporation upon audit. Although the shareholder need not request the Service’s consent to make a retroactive election under
this regime, the shareholder must satisfy
certain conditions to make a retroactive
election.
First, except for certain small shareholders, the shareholder must be able to
establish that the shareholder reasonably
believed, within the meaning of temporary regulation § 1.1295–3T(d), as of the
election due date, that the foreign corporation was not a PFIC. Temporary regulation § 1.1295–3T(d) interprets the reasonable belief standard to require an actual
determination by the shareholder, based
on a good faith application of the law, that
a foreign corporation was not a PFIC.
Therefore, to satisfy the reasonable belief
requirement, the shareholder must know
and understand the PFIC provisions, and
must make a good faith effort to apply the
income and asset tests of section 1296 to
determine whether the foreign corporation is a PFIC.
Except for certain small shareholders, a
shareholder must file a single Protective
Statement pursuant to temporary regulation § 1.1295–3T(c) that applies to a taxable year to preserve the shareholder’s
ability to make a retroactive election with
respect to such taxable year of the shareholder and subsequent taxable years. The
Protective Statement must contain information describing the basis for the shareholder’s conclusion as of the election due
date that the foreign corporation was not a
PFIC for its taxable year that ended in the
first taxable year of the shareholder for
which the Protective Statement applies.
As part of the Protective Statement, the
shareholder must extend the periods of
limitations for the assessment of taxes determined under sections 1291 through
1297 (PFIC related taxes) for all taxable
years to which the Protective Statement

9

will apply, as provided in § 1.1295–
3T(c)(4) of the temporary regulations.
The shareholder also must include certain
additional information in the Protective
Statement. A special transition rule permits shareholders to use the protective
regime for taxable years ending prior to
January 2, 1998, provided the periods of
limitations on the assessment of taxes for
such years have not expired.
Temporary regulation § 1.1295–3T(e)
provides special rules for certain small
shareholders. A shareholder that qualifies
under § 1.1295–3T(e) for a taxable year
will not be required to satisfy the reasonable belief requirement or file a Protective
Statement to preserve the shareholder’s
ability to make a retroactive election with
respect to such year (a qualified shareholder).
Except as provided below, a shareholder is a qualified shareholder only if
the shareholder owns, directly, indirectly
or constructively, less than two percent of
the vote and value of each class of stock
of the foreign corporation during such
year, and has not filed a Protective Statement that applies to an earlier year included in the shareholder’s holding period
of stock of the foreign corporation. In
addition, for the special rule to apply to a
taxable year of the shareholder, the foreign corporation or its U.S. counsel must
have indicated in a corporate filing, shareholder mailing or similar document that
the foreign corporation reasonably believed that it was not a PFIC for the taxable year of the foreign corporation that
ended with or within such taxable year of
the shareholder. However, no shareholder
will be a qualified shareholder if the
shareholder knew that the corporation
was in fact a PFIC or knew or had reason
to know that a corporate filing relating to
the corporation’s PFIC status was inaccurate. For this purpose, a shareholder will
be treated as knowing that the corporation
was in fact a PFIC if the principal activity
of the foreign corporation is owning or
trading a diversified portfolio of stock, securities, or other financial contracts. A
qualified shareholder that makes a valid
retroactive election in its earliest open
taxable year in which the foreign corporation is a PFIC may, subject to certain conditions, be treated as a shareholder of a
pedigreed QEF even if the period of limitations for the assessment of taxes for an

February 23, 1998

earlier taxable year in which the corporation qualified as a PFIC has expired.
c. Consent Regime.
Certain taxpayers have urged the Service to interpret the reasonable belief requirement of section 1295(b)(2) to allow
a shareholder to make a retroactive election if the shareholder or its tax adviser
did not know or properly apply the PFIC
rules. In particular, certain taxpayers
have recommended adoption of the reasonable action and good faith standard of
§ 301.9100 regulations for demonstrating
reasonable belief.
Treasury and the Service recognize that
the PFIC rules are complex and, in some
cases, difficult for shareholders to apply.
Accordingly, the temporary regulations
provide that, in certain limited circumstances, a shareholder may obtain the
Commissioner ’s consent to make a
retroactive election, even if the shareholder failed to know or properly apply
the PFIC rules in the earlier year. Under
temporary regulation § 1.1295–3T(f), a
shareholder that reasonably relied on the
advice of a qualified tax professional may
request consent to make a retroactive
election.
In response to taxpayer comments,
Treasury and the Service have incorporated into the consent regime certain rules
set forth in § 301.9100 regulations. As
described below, temporary regulation
§ 1.1295–3T(f)(1) and (4), respectively,
require the shareholder to have reasonably relied on a qualified tax professional
and to document such reliance. The Service will not grant consent under this
regime if doing so would prejudice the interests of the government by placing the
shareholder in a position more favorable
than if the shareholder had made the section 1295 election on a timely basis. The
temporary regulations provide that in certain cases the interests of the government
may be preserved by a closing agreement
between the Service and the shareholder
requiring the shareholder to make a payment to the government that compensates
the government for amounts that would
have been due in respect of closed years
affected by the retroactive election.
Under temporary regulation § 1.1295–
3T(f)(2), the Service will treat a shareholder as having reasonably relied on a
qualified tax professional (including an

February 23, 1998

employee of the shareholder), within the
meaning of the § 301.9100 regulations, if
the qualified tax professional failed to
identify the corporation as a PFIC or
failed to advise the shareholder of the
consequences of making, or failing to
make, a section 1295 election. Therefore,
if a qualified tax professional, due to ignorance of the law or negligence, failed to
identify the corporation as a PFIC or
failed to advise the shareholder of the
consequences of making, or failing to
make, the section 1295 election, the Commissioner may consent to a retroactive
election. However, in no event will the
Commissioner consent to a retroactive
election if, prior to the application for
such consent, the Service has raised the
PFIC status of the foreign corporation in
an audit of the retroactive election year or
any subsequent year. Furthermore, a
shareholder may not disregard knowledge
that the corporation was a PFIC or advice
or knowledge relating to the tax consequences of owning stock of a PFIC and
then request relief under this regime.
d. Who Makes a Retroactive Election
and Who Satisfies the Requirements
of the Protective or Consent
Regime.
Temporary regulation § 1.1295–3T
adopts the rules of temporary regulation
§ 1.1295–1T(d), relating to who may
make a section 1295 election, for purposes
of determining the appropriate person to
satisfy the requirements of the protective
or consent regime and to make a retroactive election. Consistent with these rules,
temporary regulation § 1.1295–3T(c)(3)
provides that the person that executes and
files the Protective Statement under the
protective regime is the person that makes
the section 1295 election, as provided in
§ 1.1295–1T(d). Temporary regulation
§ 1.1295–3T(f)(4)(vi) sets forth a similar
rule for requests for consent under the
consent regime. In addition, temporary
regulation § 1.1295–3T(g)(3) provides for
an entity-level retroactive election in the
case of domestic partnerships, S corporations, domestic nongrantor trusts, and domestic estates that own stock of a PFIC,
and a partner or beneficiary-level retroactive election in the case of foreign partnerships, foreign trusts, domestic grantor
trusts, and foreign estates that own stock
of a PFIC.

10

The Service welcomes comments concerning the benefits of requiring certain
entities, rather than their interest holders,
to satisfy the requirements under the protective and consent regimes. In particular, comments are requested concerning
whether requiring S corporations, domestic nongrantor trusts, and domestic estates
to satisfy the requirements of the protective regime at the entity-level is inappropriate.
e. Making a Retroactive Election.
A shareholder that has satisfied the requirements of the protective regime or has
obtained the consent of the Commissioner
under the consent regime must comply
with the rules in temporary regulation
§ 1.1295–3T(g) for making a retroactive
election. In general, the shareholder must
file an amended return for the retroactive
election year in which the shareholder
complies with the requirements for making a section 1295 election, report its pro
rata shares of the ordinary earnings and
net capital gain of the foreign corporation
for that year (section 1293 inclusion), if
any, and pay any taxes resulting from the
redetermination of its income and any applicable section 6621 interest. The shareholder also must file amended returns for
the taxable years that follow the retroactive election year in which the foreign
corporation is a PFIC and a QEF to report
the section 1293 inclusion for each of
these years, and pay the resulting tax and
section 6621 interest. If the shareholder’s
taxable year in which the corporation first
qualified as a PFIC, or the retroactive
election year or any subsequent taxable
years, are closed for the assessment of
PFIC related taxes (i.e., in certain cases
where the shareholder is a qualified shareholder or the shareholder has obtained the
consent of the Commissioner to file a
retroactive election), the shareholder must
file amended returns to report section
1293 inclusions in all open affected years
beginning with the first taxable year open
for the assessment of tax on such
amounts.
7. Removal of § 1.1291–9(i)(1).
Section 1121 of the 1997 TRA amends
section 1296, adding section 1296(e).
Section 1296(e) provides that after December 31, 1997, a controlled foreign corporation (as defined in section 957(a))

1998–8 I.R.B.

(CFC) will not be treated as a PFIC with
respect to a U.S. shareholder (as defined
in section 951(b)) of the CFC. After a
shareholder ceases to qualify for this exception, because the shareholder ceases to
be subject to subpart F, generally the
shareholder will have a new holding period for purposes of the PFIC provisions
pursuant to section 1296(e)(3)(A). However, pursuant to section 1296(e)(3)(B), if
the foreign corporation was a nonqualified fund before the shareholder qualified
for this exception, and the shareholder did
not make the section 1297(b)(1) election
to purge the stock of its PFIC taint, the
shareholder will not get a new holding period when it ceases to qualify for the exception for U.S. shareholders of CFCs.
Congress, in the Conference Report to the
1997 TRA, H.R. Rept. 105–220, 105th
Congress, 1st session, at 625, stated that
“the stock held by such shareholder continues to be treated as PFIC stock unless
the shareholder makes an election to pay
tax and an interest charge with respect to
the unrealized appreciation in the stock or
the accumulated earnings of the corporation.” Congress thus indicated its intent
that a shareholder may apply the rules of
either section 1291(d)(2)(A), the deemed
sale election, or section 1291(d)(2)(B),
the deemed dividend election, when making the section 1297(b)(1) election to
purge a former PFIC of its PFIC taint. In
order to give effect to that intent, Treasury
and the IRS have decided to remove
§ 1.1291–9(i)(1), which provides that the
rules of § 1.1291–9, the deemed dividend
election, do not apply to an election under
section 1297(b)(1). The removal of
§ 1.1291–9(i)(1) is effective as of January
2, 1998. Section 1.1291–9(i)(2) is not affected by the removal of § 1.1291–9(i)(1).

2, 1998, a shareholder that applied the
rules of section 1291(d)(2)(A) and
§ 1.1291–10 to a section 1297(b)(1) election, made with respect to a former PFIC
that was a CFC in its last taxable year as a
PFIC under section 1296(a), may file an
amended return for its taxable year that
includes the termination date, as defined
in § 1.1297–3T(a), and apply the rules of
the deemed dividend election to its section 1297(b)(1) election at any time before the expiration of the period of limitations for the assessment of taxes for that
taxable year. Section 1.1297–3T(c) is effective as of January 2, 1998.

Section 1.1293–1T also issued under
26 U.S.C. 1293.* * *
Section 1.1295–1T also issued under
26 U.S.C. 1295(b).
Section 1.1295–3T also issued under
26 U.S.C. 1295(b).* * *

Special Analyses

§ 1.1294–0 Table of contents.

It has been determined that this Treasury Decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
these temporary regulations will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on their impact on small business. An initial regulatory flexibility
analysis has been prepared for the proposed regulations for which these temporary regulations serve as a text and which
is set forth in REG–115795–97.

This section contains a listing of the
headings for § 1.1294–1T.
Par. 4. The section heading and introductory text for § 1.1297–0 are added to
read as follows:

Drafting Information
The principal authors of these regulations are Gayle Novig and Judith Cavell
Cohen, of the Office of the Associate
Chief Counsel (International). Other personnel from the IRS and Treasury Department also participated in the development
of these regulations.
*

8. Section 1297.
The temporary regulations amend
§ 1.1297–3T to provide that a shareholder
of a former PFIC, within the meaning of
§ 1.1291–9(j)(2)(iv), that was a CFC during its last taxable year as a PFIC under
section 1296(a), may apply the rules of
the deemed dividend election under section 1291(d)(2)(B) and § 1.1291–9 to its
section 1297(b)(1) election made by the
time and in the manner provided in
§ 1.1297–3T(b). If the time for making a
section 1297(b)(1) election, provided in
§ 1.1297–3T(b), expired before January

1998–8 I.R.B

*

*

*

*

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding the following
entries, in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1291–1T also issued under
26 U.S.C. 1291.* * *

11

§ 1.1291–0 [Amended]
Par. 2. Section 1.1291–0 is amended
by removing and reserving the entry for
§ 1.1291–9(i)(1).
Par. 3. The section heading and introductory text for § 1.1294–0 are added to
read as follows:

§ 1.1297–0 Table of contents.
This section contains a listing of the
headings for § 1.1297–3T.
§ 1.1291–0T [Amended]
Par. 5. Section 1.1291–0T is amended
by:
1. Transferring the listing of the section heading and entries for § 1.1294–1T
to new § 1.1294–0.
2. Transferring the listing of the section heading and entries for § 1.1297–3T
to new § 1.1297–0.
3. Removing the section heading and
introductory text.
Par. 6. Section 1.1291–1T is added to
read as follows.
§ 1.1291–1T Taxation of U.S. persons
that are shareholders of PFICs that re
not pedigreed QEFs (temporary).
(a) through (d) [Reserved].
(e) Exempt organization as shareholder—(1) In general. If the shareholder of a PFIC is an organization exempt from tax under this chapter, section
1291 and these regulations apply to such
shareholder only if a dividend from the
PFIC would be taxable to the organization
under subchapter F.
(2) Effective date. Paragraph (e)(1) of
this section is applicable on and after
April 1, 1992.

February 23, 1998

§ 1.1291–9 [Amended]
Par. 7. Section 1.1291–9 is amended
by removing and reserving paragraph
(i)(1).
Par. 8. Section 1.1293–0 is added to
read as follows.
§ 1.1293–0 Table of contents.
This section contains a listing of the
headings for § 1.1293–1T.
§ 1.1293–1T Current inclusion of income
of qualified electing funds (temporary).
(a) In general. [Reserved].
(1) Other rules. [Reserved].
(2) Net capital gain defined.
(i) In general.
(ii) Effective date.
(b) Other rules. [Reserved].
(c) Application of rules of inclusion
with respect to stock held by a
pass through entity.
(1) In general.
(2) QEF stock transferred to a pass
through entity.
(i) Pass through entity makes a section 1295 election.
(ii) Pass through entity does not make
a section 1295 election.
(3) Effective date.
Par. 9. Section 1.1293–1T is added to
read as follows:
§ 1.1293–1T Current taxation of income
from qualified electing funds
(temporary).
(a) In general. [Reserved].
(1) Other rules. [Reserved].
(2) Net capital gain defined—(i) In
general. This paragraph (a)(2) defines the
term net capital gain for purposes of sections 1293 and 1295 and the regulations
under those sections. The QEF, as defined in § 1.1291–9(j)(2)(i), in determining its net capital gain for a taxable year,
may either—
(A) Calculate and report the amount of
each category of long-term capital gain
provided in section 1(h) that was recognized by the PFIC in the taxable year;
(B) Calculate and report the amount of
net capital gain recognized by the PFIC in
the taxable year, stating that that amount
is subject to the highest capital gain rate
of tax applicable to the shareholder; or
(C) Calculate its earnings and profits
for the taxable year and report the entire
amount as ordinary earnings.

February 23, 1998

(ii) Effective date. Paragraph (a)(2)(i)
of this section is applicable to sales by
QEFs during their taxable years ending on
or after May 7, 1997.
(b) Other rules. [Reserved].
(c) Application of rules of inclusion
with respect to stock held by a pass
through entity—(1) In general. A domestic pass through entity takes into account
its pro rata shares of the ordinary earnings
and net capital gain attributable to the
QEF shares held by the pass through entity. A U.S. person that indirectly owns
QEF shares through the domestic pass
through entity accounts for its pro rata
shares of ordinary earnings and net capital
gain attributable to the QEF shares according to the general rules applicable to
inclusions of income from the domestic
pass through entity. For the definition of
pass through entity, see § 1.1295–1T(j).
(2) QEF stock transferred to a pass
through entity—(i) Pass through entity
makes a section 1295 election. If a shareholder transfers stock subject to a section
1295 election to a domestic pass through
entity of which it is an interest holder and
the pass through entity makes a section
1295 election with respect to that stock,
as provided in § 1.1295–1T(d)(2), the
shareholder takes into account its pro rata
shares of the ordinary earnings and net
capital gain attributable to the QEF shares
under the rules applicable to inclusions of
income from the pass through entity.
(ii) Pass through entity does not make a
section 1295 election. If the pass through
entity does not make a section 1295 election with respect to the PFIC, the shares of
which were transferred to the pass through
entity subject to the 1295 election of the
shareholder, the shareholder continues to
be subject, in its capacity as an indirect
shareholder, to the income inclusion rules
of section 1293 and reporting rules required of shareholders of QEFs. Proper
adjustments to reflect an inclusion in income under section 1293 by the indirect
shareholder must be made, under the principles of § 1.1291–9(f), to the basis of the
indirect shareholder’s interest in the pass
through entity.
(3) Effective date. Paragraph (c) of
this section is applicable to taxable years
of shareholders beginning after December
31, 1997.
Par. 10. Section 1.1295–0 is added to
read as follows:

12

§ 1.1295–0 Table of contents.
This section contains a listing of the
headings for §§ 1.1295–1T and
1.1295–3T.
§ 1.1295–1T Qualified electing funds
(temporary).
(a) In general. [Reserved].
(b) Application of section 1295 election. [Reserved].
(1) Election personal to shareholder.
[Reserved].
(2) Election applicable to specific
corporation only.
(i) In general. [Reserved].
(ii) Stock of QEF received in a nonrecognition transfer. [Reserved].
(iii) Exception for options.
(3) Application of general rules to
stock held by a pass through entity.
(i) Stock subject to a section 1295
election transferred to a pass
through entity.
(ii) Limitation on application of pass
through entity’s section 1295 election.
(iii) Effect of partnership termination
on section 1295 election.
(iv) Characterization of stock held
through a pass through entity.
(4) Application of general rules to a
taxpayer filing a joint return under
section 6013.
(c) Effect of section 1295 election.
(1) In general.
(2) Years to which section 1295 election applies.
(i) In general.
(ii) Effect of PFIC status on election.
(iii) Effect on election of complete termination of a shareholder’s interest in the PFIC.
(iv) Effect on section 1295 election of
transfer of stock to a domestic
pass through entity.
(v) Examples.
(d) Who may make a section 1295
election.
(1) General rule.
(2) Application of general rule to pass
through entities.
(i) Partnerships.
(A) Domestic partnership.
(B) Foreign partnership.
(ii) S corporation.
(iii) Trust or estate.

1998–8 I.R.B.

(A) Domestic trust or estate.
(1) Nongrantor trust or estate.
(2) Grantor trust.
(B) Foreign trust or estate.
(1) Nongrantor trust or estate.
(2) Grantor trust.
(iv) Indirect ownership of the pass
through entity or the PFIC.
(3) Member of consolidated return
group as shareholder.
(4) Option holder.
(5) Exempt organization.
(e) Time for making a section 1295
election.
(f) Manner of making a section 1295
election and the annual election
requirements of the shareholder.
(1) Manner of making the election.
(2) Annual election requirements.
(i) In general.
(ii) Retention of documents.
(g) Annual election requirements of
the PFIC or intermediary.
(1) PFIC Annual Information Statement.
(2) Alternative documentation.
(3) Annual Intermediary Statement.
(4) Combined statements.
(i) PFIC Annual Information Statement.
(ii) Annual Intermediary Statement.
(h) Transition rules.
(i) Invalidation, termination or revocation of section 1295 election.
(1) Invalidation or termination of
election at the discretion of the
Commissioner.
(i) In general.
(ii) Deferral of section 1293 inclusion.
(iii) When effective.
(2) Shareholder revocation.
(i) In general.
(ii) Time for and manner of requesting consent to revoke.
(A) Time.
(B) Manner of making request.
(iii) When effective.
(3) Effect of invalidation, termination, or revocation.
(4) Election after invalidation, termination, or revocation.
(j) Definitions.
(k) Effective date.

(a) In general.

General rule.
Protective Statement.
In general.
Reasonable belief statement.
Who executes and files the Protective Statement.
(4) Waiver of the periods of limitations.
(i) Time for and manner of extending
periods of limitations.
(A) In general.
(B) Application of general rule to domestic partnerships.
(1) In general.
(2) Special rules.
(i) Addition of partner to nonTEFRA partnership.
(ii) Change in status from nonTEFRA partnership to TEFRA
partnership.
(C) Application of general rule to domestic nongrantor trusts and domestic estates.
(D) Application of general rule to S
corporations.
(E) Effect on waiver of complete termination of a pass through entity
or pass through entity’s business.
(F) Application of general rule to foreign partnerships, foreign trusts,
domestic or foreign grantor trusts,
and foreign estates.
(ii) Terms of waiver.
(A) Scope of waiver.
(B) Period of waiver.
(5) Time for and manner of filing a
Protective Statement.
(i) In general.
(ii) Special rule for taxable years
ended before January 2, 1998.
(6) Applicability of the Protective
Statement.
(i) In general.
(ii) Invalidity of the Protective Statement.
(7) Retention of Protective Statement
and information demonstrating
reasonable belief.
(d) Reasonable belief.
(1) In general.
(2) Knowledge of law required.
(e) Special rules for qualified shareholders.
(1) In general.
(2) Qualified shareholder.
(3) Exceptions.
(f) Special consent.
(1) In general.

1998–8 I.R.B

13

§ 1.1295–3T Retroactive elections
(temporary).

(b)
(c)
(1)
(2)
(3)

(2) Reasonable reliance on a qualified
tax professional.
(i) In general.
(ii) Shareholder deemed to have not
reasonably relied on a qualified
tax professional.
(3) Prejudice to the interests of the
United States government.
(i) General rule.
(ii) Elimination of prejudice to the interests of the United States government.
(4) Procedural requirements.
(i) Filing instructions.
(ii) Affidavit from shareholder.
(iii) Affidavits from other persons.
(iv) Other information.
(v) Notification of Internal Revenue
Service.
(vi) Who requests special consent
under this paragraph (f) and who
enters into a closing agreement.
(g) Time for and manner of making a
retroactive election.
(1) Time for making a retroactive
election.
(i) In general.
(ii) Transition rule.
(iii) Ownership not required at time
retroactive election is made.
(2) Manner of making a retroactive
election.
(3) Who makes the retroactive election.
(4) Other elections.
(i) Section 1291(d)(2) election.
(ii) Section 1294 election.
(h) Effective date.
Par. 11. Section 1.1295–1T is added to
read as follows:
§ 1.1295–1T Qualified electing funds
(temporary).
(a) In general. [Reserved].
(b) Application of section 1295 election. [Reserved].
(1) Election personal to shareholder.
[Reserved].
(2) Election applicable to specific corporation only—
(i) In general. [Reserved].
(ii) Stock of QEF received in a nonrecognition transfer. [Reserved].
(iii) Exception for options. A shareholder’s section 1295 election does not
apply to any option to buy stock of the
PFIC.
(3) Application of general rules to
stock held by a pass through entity—(i)

February 23, 1998

Stock subject to a section 1295 election
transferred to a pass through entity. A
shareholder’s section 1295 election will
not apply to a domestic pass through entity to which the shareholder transfers
stock subject to a section 1295 election,
or to any other U.S. person that is an interest holder or beneficiary of the domestic pass through entity. 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 pass through entity will
continue to be subject to the section 1295
election with respect to the stock indirectly owned through the pass through entity and any other stock of that PFIC
owned by the shareholder.
(ii) Limitation on application of pass
through entity’s section 1295 election.
Except as provided in paragraph (c)(2)(iv)
of this section, a section 1295 election
made by a domestic pass through entity
does not apply to other stock of the PFIC
held directly or indirectly by the interest
holder or beneficiary.
(iii) Effect of partnership termination
on section 1295 election. Termination of
a section 1295 election made by a domestic partnership 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. Except as otherwise
provided, the stock of the PFIC of which
the new partners are indirect shareholders
will be treated as stock of a QEF only if
the new domestic partnership makes a
section 1295 election with respect to that
stock.
(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 an interest holder or
beneficiary only if—
(A) In the case of PFIC stock acquired
(other than in a transaction in which gain
is not recognized pursuant to regulations
under section 1291(f) with respect to that
stock), and held by a domestic pass
through entity, the pass through entity
makes the section 1295 election and the
PFIC has been a QEF with respect to the
pass through entity for all taxable years

February 23, 1998

that are included wholly or partly 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 § 1.1291–9(j)(1); or
(B) 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 recognized pursuant to
regulations under section 1291(f) with respect to that stock and held by the pass
through entity, the PFIC stock transferred
to the pass through entity was treated as
stock of a pedigreed QEF with respect to
the interest holder or beneficiary at the
time of the transfer and the pass through
entity makes a section 1295 election.
(4) Application of general rules to a
taxpayer filing a joint return under section 6013. A section 1295 election made
by a taxpayer in a joint return, within the
meaning of section 6013, will be treated
as also made by the spouse that joins in
the filing of that return.
(c) Effect of section 1295 election—(1)
In general. Except as otherwise provided
in this paragraph (c), the effect of a shareholder’s section 1295 election is to treat
the foreign corporation as a QEF with respect to the shareholder for each taxable
year of the foreign corporation ending
with or within a taxable year of the shareholder for which the election is effective.
A section 1295 election is effective for the
shareholder’s election year and all subsequent taxable years of the shareholder unless invalidated, terminated or revoked as
provided in paragraph (i) of this section.
The terms shareholder and shareholder’s
election year are defined in paragraph (j)
of this section.
(2) Years to which section 1295 election applies—(i) In general. Except as
otherwise provided in this paragraph (c),
a foreign corporation with respect to
which a section 1295 election is made
will be treated as a QEF for its taxable
year ending with or within the shareholder’s election year and all subsequent
taxable years of the foreign corporation
that are included wholly or partly in the
shareholder’s holding period (or periods)
of stock of the foreign corporation.
(ii) Effect of PFIC status on election.
A foreign corporation will not be treated
as a QEF for any taxable year of the foreign corporation that the foreign corpora-

14

tion is not a PFIC under section 1296(a)
and is not treated as a PFIC under section
1297(b)(1). However, cessation of a foreign corporation’s status as a PFIC will
not terminate a section 1295 election.
(iii) Effect on election of complete termination of a shareholder’s interest in the
PFIC. Complete termination of a shareholder’s direct and indirect interest in stock
of a foreign corporation will not terminate
a shareholder’s section 1295 election with
respect to the foreign corporation.
(iv) Effect on section 1295 election of
transfer of stock to a domestic pass
through entity. The transfer of a shareholder’s direct or indirect interest in stock
of a foreign corporation to a domestic
pass through entity (as defined in paragraph (j) of this section) will not terminate the shareholder ’s section 1295
election with respect to the foreign corporation, whether or not the pass through
entity makes a section 1295 election. For
the rules concerning the application of
section 1293 to stock transferred to a domestic pass through entity, see
§ 1.1293–1T(c).
(v) Examples. The following examples illustrate the rules of this paragraph
(c)(2).
Example 1. In 1998, C, a U.S. person, purchased
stock of FC, a foreign corporation that is a PFIC.
Both FC and C are calendar year taxpayers. C made
a timely section 1295 election to treat FC as a QEF
in C’s 1998 return, and FC was therefore a pedigreed
QEF. C included its shares of FC’s 1998 ordinary
earnings and net capital gain in C’s 1998 income and
did not make a section 1294 election to defer the
time for payment of tax on that income. In 1999,
2000, and 2001, FC did not satisfy either the income
or asset test of section 1296(a), and therefore was
neither a PFIC nor a QEF. C therefore did not have
to include its pro rata shares of the ordinary earnings
and net capital gain of FC pursuant to section 1293,
or satisfy the section 1295 annual reporting requirements for any of those years. FC qualified as a PFIC
again in 2002. Because C had made a section 1295
election in 1998, and the election had not been invalidated, terminated, or revoked, within the meaning
of paragraph (i) of this section, C’s section 1295
election remains in effect for 2002. C therefore is
subject in 2002 to the income inclusion and reporting rules required of shareholders of QEFs.
Example 2. The facts are the same as in Example
(1) except that FC did not lose PFIC status in any
year and C sold all the FC stock in 1999 and repurchased stock of FC in 2002. Because C had made a
section 1295 election in 1998 with respect to stock
of FC, and the election had not been invalidated, terminated, or revoked, within the meaning of paragraph (i) of this section, C’s section 1295 election
remained in effect and therefore applies to the stock

1998–8 I.R.B.

of FC purchased by C in 2002. C therefore is subject in 2002 to the income inclusion and reporting
rules required of shareholders of QEFs.
Example 3. The facts are the same as in Example
(2) except that C is a partner in domestic partnership
P and C transferred its FC stock to P in 1999. Because C had made a section 1295 election in 1998
with respect to stock of FC, and the election had not
been invalidated, terminated, or revoked, within the
meaning of paragraph (i) of this section, C’s section
1295 election remains in effect with respect to its indirect interest in the stock of FC. If P does not make
the section 1295 election with respect to the FC
stock, C will continue to be subject, in C’s capacity
as an indirect shareholder of FC, to the income inclusion and reporting rules required of shareholders
of QEFs in 1999 and subsequent years. If P makes
the section 1295 election, C will take into account its
pro rata shares of the ordinary earnings and net capital gain of the FC under the rules applicable to inclusions of income from P.

(d) Who may make a section 1295
election—(1) General rule. Except as
otherwise provided in this paragraph (d),
any U.S. person that is a shareholder (as
defined in paragraph (j) 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 at the time 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. Except in the case of a
shareholder that is an exempt organization that may not make a section 1295
election, as provided in paragraph (d)(5)
of this section, in a chain of ownership
only the first U.S. person that is a shareholder of the PFIC may make the section
1295 election.
(2) Application of general rule to pass
through entities—(i) Partnerships—(A)
Domestic partnership. A domestic partnership that holds an interest in stock of a
PFIC makes the section 1295 election
with respect to that PFIC. The partnership election applies only to the stock of
the PFIC held directly or indirectly by the
partnership and not to any other stock
held directly or indirectly by any partner.
As provided in § 1.1293–1T(c)(1), shareholders owning stock of a QEF by reason
of an interest in the partnership take into
account the section 1293 inclusions with
respect to the QEF shares owned by the
partnership under the rules applicable to

1998–8 I.R.B

inclusions of income from the partnership.
(B) Foreign partnership. A U.S. person that holds an interest in a foreign partnership that, in turn, holds an interest in
stock of a PFIC makes the section 1295
election with respect to that PFIC. A partner’s election applies to the stock of the
PFIC owned directly or indirectly by the
foreign partnership and to any other stock
of the PFIC owned by that partner. A section 1295 election by a partner applies
only to that partner.
(ii) S corporation. An S corporation
that holds an interest in stock of a PFIC
makes the section 1295 election with respect to that PFIC. The S corporation election applies only to the stock of the PFIC
held directly or indirectly by the S corporation and not to any other stock held directly
or indirectly by any S corporation shareholder. As provided in § 1.1293–1T(c)(1),
shareholders owning stock of a QEF by
reason of an interest in the S corporation
take into account the section 1293 inclusions with respect to the QEF shares
under the rules applicable to inclusions of
income from the S corporation.
(iii) Trust or estate—(A) Domestic
trust or estate—(1) Nongrantor trust or
estate. A domestic nongrantor trust or a
domestic estate that holds an interest in
stock of a PFIC makes the section 1295
election with respect to that PFIC. The
trust or estate’s election applies only to the
stock of the PFIC held directly or indirectly by the trust or estate and not to any
other stock held directly or indirectly by
any beneficiary. As provided in § 1.1293–
1T(c)(1), shareholders owning stock of a
QEF by reason of an interest in a domestic trust or estate take into account the
section 1293 inclusions with respect to
the QEF shares under the rules applicable
to inclusions of income from the trust or
estate.
(2) Grantor trust. A U.S. person that is
treated under sections 671 through 678 as
the owner of the portion of a domestic
trust that owns an interest in stock of a
PFIC makes the section 1295 election
with respect to that PFIC. If that person
ceases to be treated as the owner of the
portion of the trust that owns an interest in
the PFIC stock and is a beneficiary of the
trust, that person’s section 1295 election
will continue to apply to the PFIC stock
indirectly owned by that person under the

15

rules of paragraph (c)(2)(iv) of this section as if the person had transferred its interest in the PFIC stock to the trust. However, the stock will be treated as stock of a
PFIC that is not a QEF with respect to
other beneficiaries of the trust, unless the
trust makes the section 1295 election as
provided in paragraph (d)(2)(iii)(A)(1) of
this section.
(B) Foreign trust or estate—(1) Nongrantor trust or estate. A U.S. person that
is a beneficiary of a foreign nongrantor
trust or estate that holds an interest in
stock of a PFIC makes the section 1295
election with respect to that PFIC. A beneficiary’s section 1295 election applies to
all the PFIC stock owned directly and indirectly by the trust or estate and to the
other PFIC stock owned directly or indirectly by the beneficiary. A section 1295
election by a beneficiary applies only to
that beneficiary.
(2) Grantor trust. A U.S. person that is
treated under sections 671 through 679 as
the owner of the portion of a foreign trust
that owns an interest in stock of a PFIC
stock makes the section 1295 election
with respect to that PFIC. If that person
ceases to be treated as the owner of the
portion of the trust that owns an interest in
the PFIC stock and is a beneficiary of the
trust, that person’s section 1295 election
will continue to apply to the PFIC stock
indirectly owned by that person under the
rules of paragraph (c)(2)(iv) of this section. However, as provided in paragraph
(d)(2)(iii)(B)(1) of this section, any other
shareholder that is a beneficiary of the
trust and that wishes to treat the PFIC as a
QEF must make the section 1295 election.
(iv) Indirect ownership of the pass
through entity or the PFIC. The rules of
this paragraph (d)(2) apply whether or not
the shareholder holds its interest in the
pass through entity directly or indirectly
and whether or not the pass through entity
holds its interest in the PFIC directly or
indirectly.
(3) Member of consolidated return
group as shareholder. Pursuant to
§ 1.1502–77(a), the common parent of an
affiliated group of corporations that join
in filing a consolidated income tax return
makes a section 1295 election for all
members of the affiliated group. An election by a common parent will be effective
for all members of the affiliated group
with respect to interests in PFIC stock

February 23, 1998

held at the time the election is made or at
any time thereafter. A separate election
must be made by the common parent for
each PFIC of which a member of the affiliated group is a shareholder.
(4) Option holder. A holder of an option to acquire stock of a PFIC may not
make a section 1295 election that will
apply to the option or to the stock subject
to the option.
(5) Exempt organization. A tax-exempt organization that is not taxable
under section 1291, pursuant to § 1.1291–
1T(e), with respect to a PFIC may not
make a section 1295 election with respect
to that PFIC. In addition, such an exempt
organization will not be subject to any
section 1295 election made by a domestic
pass through entity.
(e) Time for making a section 1295
election. Except as provided in § 1.1295–
3T, a shareholder making the section 1295
election must make the election on or before the due date, as extended under section 6081 (election due date), for filing
the shareholder’s income tax return for
the first taxable year to which the election
will apply. The section 1295 election
must be made in the original return for
that year, or in an amended return, provided the amended return is filed on or
before the election due date.
(f) Manner of making a section 1295
election and the annual election requirements of the shareholder—(1) Manner of
making the election. A shareholder must
make a section 1295 election by—
(i) Completing Form 8621 in the manner required by that form and this section
for making the section 1295 election;
(ii) Attaching Form 8621 to its federal
income tax return filed by the election due
date for the shareholder’s election year;
(iii) Receiving and reflecting in Form
8621 the information provided in the
PFIC Annual Information Statement described in paragraph (g)(1) of this section,
the Annual Intermediary Statement described in paragraph (g)(3) of this section,
or the applicable combined statement described in paragraph (g)(4) of this section,
for the taxable year of the PFIC ending
with or within the taxable year for which
Form 8621 is being filed. If the PFIC Annual Information Statement contains a
statement described in paragraph
(g)(1)(ii)(C) of this section, the shareholder must attach a statement to Form

February 23, 1998

8621 that indicates that the shareholder
rather than the QEF calculated the QEF’s
ordinary earnings and net capital gain;
and
(iv) Filing a copy of Form 8621 with
the Philadelphia Service Center, P.O.
21086, Philadelphia, PA 19114 by the
election due date.
(2) Annual election requirements—(i)
In general. A shareholder that makes a
section 1295 election with respect to a
PFIC held directly or indirectly, for each
taxable year to which the section 1295
election applies, must—
(A) Complete Form 8621 in the manner required by that form and this section;
(B) Attach Form 8621 to its federal income tax return filed by the due date of
the return, as extended;
(C) Receive and reflect in Form 8621
the PFIC Annual Information Statement
described in paragraph (g)(1) of this section, the Annual Intermediary Statement
described in paragraph (g)(3) of this section, or the applicable combined statement described in paragraph (g)(4) of this
section, for the taxable year of the PFIC
ending with or within the taxable year for
which Form 8621 is being filed. If the
PFIC Annual Information Statement contains a statement described in paragraph
(g)(1)(ii)(C) of this section, the shareholder must attach a statement to its Form
8621 that the shareholder rather than the
PFIC provided the calculations of the
PFIC’s ordinary earnings and net capital
gain; and
(D) File a copy of Form 8621 with the
Philadelphia Service Center, P.O. 21086,
Philadelphia, PA 19114 by the election
due date.
(ii) Retention of documents. For all
taxable years subject to the section 1295
election, the shareholder must retain
copies of all Forms 8621, with their attachments, and PFIC Annual Information
Statements or Annual Intermediary Statements. Failure to produce those documents at the request of the Commissioner
in connection with an examination may
result in invalidation or termination of the
shareholder’s section 1295 election.
(g) Annual election requirements of the
PFIC or intermediary—(1) PFIC Annual
Information Statement. For each year of
the PFIC ending in a taxable year of a
shareholder to which the shareholder’s
section 1295 election applies, the PFIC

16

must provide the shareholder with a PFIC
Annual Information Statement. The PFIC
Annual Information Statement is a statement of the PFIC, signed by the PFIC or
an authorized representative of the PFIC,
that contains the following information
and representation—
(i) The first and last days of the taxable
year of the PFIC to which the PFIC Annual Information Statement applies;
(ii) Either—
(A) The shareholder’s pro rata shares
of the ordinary earnings and net capital
gain (as defined in § 1.1293–1T(a)(2)) of
the PFIC for the taxable year indicated in
paragraph (g)(1)(i) of this section; or
(B) Sufficient information to enable the
shareholder to calculate its pro rata shares
of the PFIC’s ordinary earnings and net
capital gain, for that taxable year; or
(C) A statement that the foreign corporation has permitted the shareholder to examine the books of account, records, and
other documents of the foreign corporation for the shareholder to calculate the
amounts of the PFIC’s ordinary earnings
and the net capital gain according to federal income tax accounting principles and
to calculate the shareholder’s pro rata
shares of the PFIC’s ordinary earnings
and net capital gain;
(iii) The amount of cash and the fair
market value of other property distributed
or deemed distributed to the shareholder
during the taxable year of the PFIC to
which the PFIC Annual Information
Statement pertains; and
(iv) Either—
(A) A statement that the PFIC will permit the shareholder to inspect and copy
the PFIC’s permanent books of account,
records, and such other documents as may
be maintained by the PFIC to establish
that the PFIC’s ordinary earnings and net
capital gain are computed in accordance
with U.S. income tax principles, and to
verify these amounts and the shareholder’s pro rata shares thereof; or
(B) In lieu of the statement required in
paragraph (g)(1)(iv)(A) of this section, a
description of the alternative documentation requirements approved by the Commissioner, with a copy of the private letter
ruling and the closing agreement entered
into by the Commissioner and the PFIC
pursuant to paragraph (g)(2) of this section.
(2) Alternative documentation. In rare
and unusual circumstances, the Commis-

1998–8 I.R.B.

sioner will consider alternative documentation requirements necessary to verify
the ordinary earnings and net capital gain
of a PFIC other than the documentation
requirements described in paragraph
(g)(1)(iv)(A) of this section. Alternative
documentation requirements will be allowed only pursuant to a private letter ruling and a closing agreement entered into
by the Commissioner and the PFIC describing an alternative method of verifying the PFIC’s ordinary earnings and net
capital gain. If the PFIC has not obtained
a private letter ruling from the Commissioner approving an alternative method of
verifying the PFIC’s ordinary earnings
and net capital gain by the time a shareholder is required to make a section 1295
election, the shareholder may not use an
alternative method for that taxable year.
(3) Annual Intermediary Statement. In
the case of a U.S. person that is a shareholder of a PFIC through an intermediary,
as defined in paragraph (j) of this section,
an Annual Intermediary Statement issued
by an intermediary containing the information described in paragraph (g)(1) of
this section and reporting the indirect
owner’s pro rata shares of the ordinary
earnings and net capital gain of the QEF
as described in paragraph (g)(1)(ii)(A) of
this section, may be provided to the indirect owner in lieu of the PFIC Annual Information Statement if the following conditions are satisfied—
(i) The intermediary receives a copy of
the PFIC Annual Information Statement
or the intermediary receives an annual intermediary statement from another intermediary which contains a statement that
the other intermediary has received a
copy of the PFIC Annual Information
Statement and represents that the conditions of paragraphs (g)(3)(ii) and
(g)(3)(iii) of this section are met;
(ii) The representations and information contained in the Annual Intermediary
Statement reflect the representations and
information contained in the PFIC Annual
Information Statement; and
(iii) The PFIC Annual Information
Statement issued to the intermediary contains either the representation set forth in
paragraph (g)(1)(iv)(A) of this section, or,
if alternative documentation requirements
were approved by the Commissioner pursuant to paragraph (g)(2) of this section, a
copy of the private letter ruling and clos-

1998–8 I.R.B

ing agreement between the Commissioner
and the PFIC, agreeing to an alternative
method of verifying PFIC ordinary earnings and net capital gain as described in
paragraph (g)(2) of this section;
(4) Combined statements—(i) PFIC
Annual Information Statement. A PFIC
that owns directly or indirectly any stock
of one or more PFICs with respect to
which a shareholder may make the section 1295 election may prepare a PFIC
Annual Information Statement that combines with its own information and representations the information and representations of all the PFICs. The PFIC may use
any format for a combined PFIC Annual
Information Statement provided the required information and representations
are separately stated and identified with
the respective corporations.
(ii) Annual Intermediary Statement.
An intermediary described in paragraph
(g)(3) of this section that owns directly or
indirectly stock of one or more PFICs
with respect to which an indirect shareholder may make the section 1295 election may prepare an Annual Intermediary
Statement that combines with its own information and representations the information and representations with respect to
all the PFICs. The intermediary may use
any format for a combined Annual Intermediary Statement provided the required
information and representations are separately stated and identified with the intermediary and the respective corporations.
(h) Transition rules. The rules of Notice 88–125, 1988–2 C.B. 535 (see
§ 601.601(d)(2)(ii)(b) of this chapter),
apply for making elections and maintaining elections for taxable years beginning
after December 31, 1986, and before January 1, 1998. Elections made under Notice 88–125 must be maintained as provided in § 1.1295–1T for taxable years
beginning after December 31, 1997. A
section 1295 election made prior to February 1, 1998, that was intended to be effective for the taxable year of the PFIC
that began during the shareholder’s election year will be effective for that taxable
year of the foreign corporation provided
that it is clear from all the facts and circumstances that the shareholder intended
the election to be effective for that taxable
year of the foreign corporation.
(i) Invalidation, termination, or revocation of section 1295 election—(1) In-

17

validation or termination of election at
the discretion of the Commissioner—(i)
In general. The Commissioner, in the
Commissioner’s discretion, may invalidate or terminate a section 1295 election
applicable to a shareholder if the shareholder, the PFIC, or any intermediary
fails to satisfy the requirements for making a section 1295 election or the annual
election requirements of this section to
which the shareholder, PFIC, or intermediary is subject, including the requirement
to provide, on request, copies of the books
and records of the PFIC or other documentation substantiating the ordinary
earnings and net capital gain of the PFIC.
(ii) Deferral of section 1293 inclusion.
The Commissioner may invalidate any
pass through entity section 1295 election
with respect to an interest holder or beneficiary if the section 1293 inclusion with
respect to that interest holder or beneficiary is not included in the gross income
of either the pass through entity, an intermediate pass through entity, or the interest holder or beneficiary within two years
of the end of the PFIC’s taxable year due
to nonconforming taxable years of the interest holder and the pass through entity
or any intermediate pass through entity.
(iii) When effective. Termination of a
shareholder’s section 1295 election will
be effective for the taxable year of the
PFIC determined by the Commissioner in
the Commissioner’s discretion. An invalidation of a shareholder’s section 1295
election will be effective for the first taxable year to which the section 1295 election applied, and the shareholder whose
election is invalidated will be treated as if
the section 1295 election never was
made.
(2) Shareholder revocation—(i) In
general. In the Commissioner’s discretion, upon a finding of a substantial
change in circumstances, the Commissioner may consent to a shareholder’s request to revoke a section 1295 election.
Request for revocation must be made by
the shareholder that made the election and
at the time and in the manner provided in
paragraph (i)(2)(ii) of this section.
(ii) Time for and manner of requesting
consent to revoke—(A) Time. The shareholder must request consent to revoke the
section 1295 election no later than 12 calendar months after the discovery of the
substantial change of circumstances that

February 23, 1998

forms the basis for the shareholder’s request to revoke the section 1295 election.
(B) Manner of making request. A
shareholder requests consent to revoke a
section 1295 election by filing a ruling request with the Office of the Associate
Chief Counsel (International). The ruling
request must satisfy the requirements, including payment of the user fee, for filing
ruling requests with that office.
(iii) When effective. Unless otherwise
determined by the Commissioner, revocation of a section 1295 election will be effective for the first taxable year of the
PFIC beginning after the date the Commissioner consents to the revocation.
(3) Effect of invalidation, termination,
or revocation. An invalidation, termination, or revocation of a section 1295 election—
(i) Terminates all section 1294 elections, as provided in § 1.1294–1T(e), and
the undistributed PFIC earnings tax liability and interest thereon are due by the due
date, without regard to extensions, for the
return for the last taxable year of the
shareholder to which the section 1295
election applies;
(ii) In the Commissioner’s discretion,
results in a deemed sale of the QEF stock
on the last day of the PFIC’s last taxable
year as a QEF, in which gain, but not loss,
will be recognized and with respect to
which appropriate basis and holding period adjustments will be made; and
(iii) Subjects the shareholder to any
other terms and conditions that the Commissioner determines are necessary to ensure the shareholder’s compliance with
sections 1291 through 1297 or any other
provisions of the Code.
(4) Election after invalidation, termination, or revocation. Without the Commissioner’s consent a shareholder whose
section 1295 election was invalidated, terminated, or revoked under this paragraph
(i) may not make the section 1295 election with respect to the PFIC before the
sixth taxable year ending after the taxable
year in which the invalidation, termination, or revocation became effective.
(j) Definitions. For purposes of this
section—
Intermediary is 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 di-

February 23, 1998

rect 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.
Pass through entity is a partnership, S
corporation, trust, or estate.
Shareholder has the same meaning as
the term shareholder in § 1.1291–9(j)(3),
except that for purposes of this section, a
partnership and an S corporation also are
treated as shareholders. Furthermore, unless otherwise provided, an interest holder
of a pass through entity, which is treated
as a shareholder of a PFIC, also will be
treated as a shareholder of the PFIC.
Shareholder’s election year is the taxable year of the shareholder for which it
made the section 1295 election.
(k) Effective date. Section 1.1295–
1T(b)(2)(iii), (b)(3), (b)(4), and (c)
through (j) is applicable to taxable years
of shareholders beginning after December
31, 1997.
Par. 12. Section 1.1295–3T is added to
read as follows:
§ 1.1295–3T Retroactive elections
(temporary).
(a) In general. This section prescribes
the exclusive rules under which a shareholder, as defined in § 1.1295–1T(j), may
make a section 1295 election for a taxable
year after the election due date, as defined
in § 1.1295–1T(e) (retroactive election).
Therefore, a shareholder may not seek
such relief under any other provision of
the law, including § 301.9100 of this
chapter. Paragraph (b) of this section describes the general rules for a shareholder
to preserve the ability to make a retroactive election. These rules require that the
shareholder possess reasonable belief as
of the election due date that the foreign
corporation was not a PFIC for its taxable
year that ended in the shareholder’s taxable year to which the election due date
pertains, and that the shareholder file a
Protective Statement to preserve its ability to make a retroactive election. Paragraph (c) of this section establishes the
terms, conditions and other requirements
with respect to a Protective Statement required to be filed under the general rules.
Paragraph (d) of this section sets forth
factors that establish a shareholder’s reasonable belief that a foreign corporation

18

was not a PFIC. Paragraph (e) of this section prescribes special rules for certain
shareholders that are deemed to satisfy the
reasonable belief requirement and therefore are not required to file a Protective
Statement. Paragraph (f) of this section
describes the limited circumstances under
which the Commissioner may permit a
shareholder that lacked the requisite reasonable belief or failed to satisfy the requirements of paragraph (b) or (e) of this
section to make a retroactive election.
Paragraph (g) of this section provides the
time for and manner of making a retroactive election. Paragraph (h) of this section
provides the effective date of this section.
(b) General rule. Except as provided
in paragraphs (e) and (f) of this section, a
shareholder may make a retroactive election for a taxable year of the shareholder
(retroactive election year) only if the
shareholder—
(1) Reasonably believed, within the
meaning of paragraph (d) of this section,
as of the election due date that the foreign
corporation was not a PFIC for its taxable
year that ended during the retroactive
election year;
(2) Filed a Protective Statement with
respect to the foreign corporation, applicable to the retroactive election year, in
which the shareholder described the basis
for its reasonable belief and extended, in
the manner provided in paragraph (c)(4)
of this section, the periods of limitations
on the assessment of taxes determined
under sections 1291 through 1297 with
respect to the foreign corporation (PFIC
related taxes) for all taxable years of the
shareholder to which the Protective Statement applies; and
(3) Complied with the other terms and
conditions of the Protective Statement.
(c) Protective Statement—(1) In general. A Protective Statement is a statement executed under penalties of perjury
by the shareholder, or a person authorized
to sign a federal income tax return on behalf of the shareholder, that preserves the
shareholder’s ability to make a retroactive
election. To file a Protective Statement
that applies to a taxable year of the shareholder, the shareholder must reasonably
believe as of the election due date that the
foreign corporation was not a PFIC for
the foreign corporation’s taxable year that
ended during the retroactive election year.
The Protective Statement must contain—

1998–8 I.R.B.

(i) The shareholder’s reasonable belief
statement, as described in paragraph
(c)(2) of this section;
(ii) The shareholder’s agreement extending the periods of limitations on the
assessment of PFIC related taxes for all
taxable years to which the Protective
Statement applies, as provided in paragraph (c)(4) of this section; and
(iii) The following information and
representations—
(A) The shareholder’s name, address,
taxpayer identification number, and the
shareholder’s first taxable year to which
the Protective Statement applies;
(B) The foreign corporation’s name,
address, and taxpayer identification number, if any; and
(C) The highest percentage of shares
of each class of stock of the foreign corporation held directly or indirectly by the
shareholder during the shareholder’s first
taxable year to which the Protective Statement applies.
(2) Reasonable belief statement. The
Protective Statement must contain a reasonable belief statement, as described in
paragraph (c)(1) of this section. The reasonable belief statement is a description
of the shareholder’s basis for its reasonable belief that the foreign corporation
was not a PFIC for its taxable year that
ended with or within the shareholder’s
first taxable year to which the Protective
Statement applies. If the Protective Statement applies to a taxable year or years described in paragraph (c)(5)(ii) of this section, the reasonable belief statement must
describe the shareholder’s basis for its
reasonable belief that the foreign corporation was not a PFIC for the foreign corporation’s taxable year or years that ended in
such taxable year or years of the shareholder. The reasonable belief statement
must discuss the application of the income and asset tests to the foreign corporation and the factors, including those
stated in paragraph (d) of this section, that
affect the results of those tests.
(3) Who executes and files the Protective Statement. The person that executes
and files the Protective Statement is the
person that makes the section 1295 election, as provided in § 1.1295–1T(d).
(4) Waiver of the periods of limitations—(i) Time for and manner of extending periods of limitations. (A) In general.
A shareholder that files the Protective

1998–8 I.R.B

Statement with the Commissioner must
extend the periods of limitations on the assessment of all PFIC related taxes for all
of the shareholder’s taxable years to which
the Protective Statement applies, as provided in this paragraph (c)(4). The shareholder is required to execute the waiver on
such form as the Commissioner may prescribe for purposes of this paragraph
(c)(4). Until that form is published, the
shareholder must execute a statement in
which the shareholder agrees to extend the
periods of limitations on the assessment of
taxes for all the shareholder’s taxable
years to which the Protective Statement
applies, as provided in this paragraph
(c)(4), and agrees to the restrictions in
paragraph (c)(4)(ii)(A) of this section.
The shareholder or a person authorized to
sign the shareholder’s federal income tax
return must sign the form or statement. A
properly executed form or statement authorized by this paragraph (c)(4) will be
deemed consented to and signed by a Service Center Director or the Assistant Commissioner (International) for purposes of
§ 301.6501(c)–1(d) of this chapter.
(B) Application of general rule to domestic partnerships—(1) In general. A
domestic partnership that holds an interest
in stock of a PFIC satisfies the waiver requirement of paragraph (c)(4) of this section pursuant to the rules of this paragraph
(c)(4)(i)(B)(1). The partnership must file
one or more waivers obtained or arranged
under this paragraph (c)(4)(i)(B) as part
of the Protective Statement, as provided
in paragraph (c)(1) of this section. The
partnership must either—
(i) Obtain from each partner the partner’s waiver of the periods of limitations;
(ii) Obtain from each partner a duly
executed power of attorney under §
601.501 of this chapter authorizing the
partnership to extend that partner’s periods of limitations, and execute a waiver
on behalf of the partners; or
(iii) In the case of a domestic partnership governed by the unified audit and litigation procedures of sections 6221 through
6233 (TEFRA partnership), arrange for the
tax matters partner (or any other person authorized to enter into an agreement to extend the periods of limitations), as provided in section 6229(b), to execute a
waiver on behalf of all the partners.
(2) Special rules—(i) Addition of
partner to non-TEFRA partnership. In

19

the case of any individual who becomes a
partner in a domestic partnership other
than a TEFRA partnership (non-TEFRA
partnership) in a taxable year subsequent
to the year in which the partnership filed a
Protective Statement, the partner and the
partnership must comply with the rules
applicable to non-TEFRA partnerships, as
provided in paragraph (c)(4)(i)(B)(1) of
this section, by the due date, as extended,
for the federal income tax return of the
partnership for the taxable year during
which the individual became a partner.
Failure to so comply will render the Protective Statement invalid with respect to
the partnership and partners.
(ii) Change in status from non-TEFRA
partnership to TEFRA partnership. If a
partnership is a non-TEFRA partnership
in one taxable year but becomes a TEFRA
partnership in a subsequent taxable year,
the partnership must file one or more
waivers obtained or arranged under this
paragraph (c)(4)(i)(B)(2)(ii), as part of the
Protective Statement, as provided in paragraph (c)(1) of this section. The partnership must either obtain from any new
partner the partner’s waiver described in
this paragraph (c)(4); obtain from the new
partner a duly executed power of attorney
under § 601.501 of this chapter authorizing the partnership to extend the partner’s
periods of limitations, and execute a
waiver on behalf of the new partner; or
arrange for the tax matters partner (or any
other person authorized to enter into an
agreement to extend the periods of limitations) to execute a waiver on behalf of all
the partners. In each case, the partnership
must attach any new waiver of a partner’s
periods of limitations, and a copy of the
Protective Statement to its federal income
tax return for that taxable year.
(C) Application of general rule to domestic nongrantor trusts and domestic estates. A domestic nongrantor trust or a
domestic estate that holds an interest in
stock of a PFIC satisfies the waiver requirement of this paragraph (c)(4) at the
entity level. For this purpose, such entity
must comply with rules similar to those
applicable to non-TEFRA partnerships, as
provided in paragraph (c)(4)(i)(B)(1) of
this section.
(D) Application of general rule to S
corporations. An S corporation that holds
an interest in stock of a PFIC satisfies the
waiver requirement of this paragraph

February 23, 1998

(c)(4) at the S corporation level. For this
purpose, the S corporation must comply
with rules similar to those applicable to
non-TEFRA partnerships, as provided in
paragraph (c)(4)(i)(B)(1) of this section.
However, in the case of an S corporation
that was governed by the unified audit
corporate proceedings of sections 6241
through 6245 for any taxable year to
which a Protective Statement applies (former TEFRA S corporation), the tax matters person (or any other person authorized to enter into such an agreement), as
was provided in sections 6241 through
6245, may execute a waiver described in
this paragraph (c)(4) that applies to such
taxable year; for any other taxable year,
the former TEFRA S corporation must
comply with rules similar to those applicable to non-TEFRA partnerships.
(E) Effect on waiver of complete termination of a pass through entity or pass
through entity’s business. The complete
termination of a pass through entity described in paragraphs (c)(4)(i)(B) through
(D) of this section, or a pass through entity’s trade or business, will not terminate
a waiver that applies to a partner, shareholder, or beneficiary.
(F) Application of general rule to foreign partnerships, foreign trusts, domestic or foreign grantor trusts, and foreign
estates. A U.S. person that is a partner or
beneficiary of a foreign partnership, foreign trust, or foreign estate that holds an
interest in stock of a PFIC satisfies the
waiver requirement of this paragraph
(c)(4) at the partner or beneficiary level.
A U.S. person that is treated under sections 671 through 679 as the owner of the
portion of a domestic or foreign trust that
owns an interest in PFIC stock also satisfies the waiver requirement at the owner
level. A waiver by a partner or beneficiary applies only to that partner or beneficiary, and is not affected by a complete
termination of the entity or the entity’s
trade or business.
(ii) Terms of waiver—(A) Scope of
waiver. The waiver of the periods of limitations is limited to the assessment of
PFIC related taxes. If the period of limitations for a taxable year affected by a
retroactive election has expired with respect to the assessment of other non-PFIC
related taxes, no adjustments, other than
consequential changes, may be made by
the Internal Revenue Service or by the

February 23, 1998

shareholder to any other items of income,
deduction, or credit for that year. If the
period of limitations for refunds or credits
for a taxable year affected bya retroactive
election is open only by virtue of the assessment period extension and section
6511(c), no refund or credit is allowable
on grounds other than adjustments to
PFIC related taxes and consequential
changes.
(B) Period of waiver. The extension of
the periods of limitations on the assessment of PFIC related taxes will be effective for all of the shareholder’s taxable
years to which the Protective Statement
applies. In addition, the waiver, to the extent it applies to the period of limitations
for a particular year, will terminate with
respect to that year no sooner than three
years from the date on which the shareholder files an amended return, as provided in paragraph (g) of this section, for
that year. For the suspension of the running of the period of limitations for the
collection of taxes for which a shareholder has elected under section 1294 to
extend the time for payment, as provided
in paragraph (g)(3)(ii) of this section, see
sections 6503(i) and 6229(h).
(5) Time for and manner of filing a
Protective Statement—(i) In general.
Except as provided in paragraph (c)(5)(ii)
of this section, a Protective Statement
must be attached to the shareholder’s federal income tax return for the shareholder’s first taxable year to which the
Protective Statement will apply. The
shareholder also must file a copy of the
Protective Statement with the Philadelphia Service Center, P.O. 21086, Philadelphia, PA 19114. The shareholder must
file its return and the copy of the Protective Statement by the due date, as extended, for the return.
(ii) Special rule for taxable years
ended before January 2, 1998. A shareholder may file a Protective Statement that
applies to the shareholder’s taxable year or
years that ended before January 2, 1998,
provided the period of limitations on the
assessment of taxes for any such year has
not expired (open year). The shareholder
must file the Protective Statement applicable to such open year or years, as provided
in paragraph (c)(5)(i) of this section, by
the due date, as extended, for the shareholder’s return for the first taxable year
ending after January 2, 1998.

20

(6) Applicability of the Protective
Statement—(i) In general. Except as
otherwise provided in this paragraph
(c)(6), a Protective Statement applies to
the shareholder’s first taxable year for
which the Protective Statement was filed
and to each subsequent taxable year. The
Protective Statement will not apply to any
taxable year of the shareholder during
which the shareholder does not own any
stock of the foreign corporation or to any
taxable year thereafter. Accordingly, if
the shareholder has not made a retroactive
election with respect to the previously
owned stock by the time the shareholder
reacquires stock of the foreign corporation, the shareholder must file another
Protective Statement to preserve its right
to make a retroactive election with respect
to the later acquired stock. For the rule
that provides that a section 1295 election
made with respect to a foreign corporation applies to stock of that corporation
acquired after a lapse in ownership, see
§ 1.1295–1T(c)(2)(iii).
(ii) Invalidity of the Protective Statement. A shareholder will be treated as if it
never filed a Protective Statement if—
(A) The shareholder failed to make a
retroactive election by the date prescribed
for making the retroactive election in
paragraph (g)(1) of this section; or
(B) The waiver of the periods of limitations terminates (by reason of a court
decision or other determination) with respect to any taxable year before the expiration of three years from the date of filing of an amended return for that year
pursuant to paragraph (g) of this section.
(7) Retention of Protective Statement
and information demonstrating reasonable belief. A shareholder that files a Protective Statement must retain a copy of
the Protective Statement and its attachments and must, for each taxable year of
the shareholder to which the Protective
Statement applies, retain information sufficient to demonstrate the shareholder’s
reasonable belief that the foreign corporation was not a PFIC for the taxable year of
the foreign corporation ending during
each such taxable year of the shareholder.
(d) Reasonable belief—(1) In general.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A21391b92bfce1d39. Public record. Not legal advice.