General Rules for Making and Maintaining Qualified Electing Fund Elections

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8750]

RIN 1545-AV40

General Rules for Making and Maintaining Qualified Electing Fund

Elections

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary and final regulations.

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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 set forth in the notice of proposed rulemaking on this

subject in the Proposed Rules section of this issue of the Federal

Register. In addition, this document removes Sec. 1.1291-9(i)(1) of the

final regulations, and amends Sec. 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 Secs. 1.1291-1T(e)(2), 1.1293-

1T(a)(2)(ii),

[[Page 7]]

1.1293-1T(c)(3), 1.1295-1T(k), 1.1295-3T(h), and Sec. 1.1297-3T(c)(3)

of these regulations.

FOR FURTHER INFORMATION CONTACT:

Gayle Novig, (202) 622-3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

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 the cross-

referencing notice of proposed rulemaking published in the Proposed

Rules section of this issue of the Federal Register.

Books or records relating to a collection of information must be

retained as long as their contents may become material in the

administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by 26 U.S.C. 6103.

Background

This document contains amendments to 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 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 FR 6770), with

the publication of temporary regulations (TD 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 Sec. 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 FR 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

Sec. 1.1295-2, published December 24, 1996 (61 FR 67752), permits

certain shareholders to make a special section 1295 election with

respect to certain preferred stock. Proposed regulation Sec. 1.1293-2,

also published December 24, 1996 (61 FR 67752), provides the special

inclusion rules applicable to shareholders that make the special

section 1295 election with respect to their preferred stock.

Temporary regulations Sec. 1.1297-3T, published March 2, 1988 (53

FR 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 FR 68149), provides that the deemed dividend

election rules of Sec. 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 (52 FR 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 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.

[[Page 8]]

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 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 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 Sec. 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 Sec. 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 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.

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,

[[Page 9]]

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

domestic 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

holder 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 Sec. 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 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 C.B. 1124),

section 1291 and the regulations under section 1291 apply to a tax-

exempt organization that is a shareholder of a PFIC that is not a

pedigreed QEF, within the meaning of Sec. 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 Sec. 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 2, 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. 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 Sec. 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 Sec. 1.1291-

1(h)(3), the holding period of stock acquired upon exercise of an

option treated as stock under Sec. 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 Sec. 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.

[[Page 10]]

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 a 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 Sec. 1.1295-T(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 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 Sec. 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 are provided in Sec. 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 share-

holders 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 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.

4. Exempt organizations subject to section 1291

As stated above, the temporary regulations include the rule of

proposed regulation Sec. 1.1291-1(e). Under temporary regulation

Sec. 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 Secs. 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, Sec. 1.1295-1T(c) through

(j) will apply to taxable years of shareholders beginning after

December 31, 1997. As provided in Sec. 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 Sec. 1.1291-1T(e) will apply on and after

April 1, 1992.

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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 Secs. 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

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 Sec. 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 (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 Sec. 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 Sec. 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 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

Sec. 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 Sec. 1.1295-3T(d), as of the

election due date, that the foreign corporation was not a PFIC.

Temporary regulation Sec. 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

Sec. 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 will apply, as

provided in Sec. 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 Sec. 1.1295-3T(e) provides special rules for

certain small shareholders. A shareholder that qualifies under

Sec. 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

[[Page 12]]

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 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 Sec. 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 Sec. 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

Sec. 301.9100 regulations. As described below, temporary regulation

Sec. 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 then 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 Sec. 1.1295-3T(f)(2), the Service will

treat a shareholder as having reasonably relied on a qualified tax

professional (including an employee of the shareholder), within the

meaning of the Sec. 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 Sec. 1.1295-3T adopts the rules of temporary

regulation Sec. 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

Sec. 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 Sec. 1.1295-1T(d).

Temporary regulation Sec. 1.1295-3T(f)(4)(vi) sets forth a similar rule

for requests for consent under the consent regime. In addition,

temporary regulation Sec. 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.

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

Sec. 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 Sec. 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

[[Page 13]]

957(a)) (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 creases 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 Sec. 1.1291-9(i)(1), which provides that the rules of

Sec. 1.1291-9, the deemed dividend election, do not apply to an

election under section 1297(b)(1). The removal of Sec. 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 Sec. 1.1291-9(i)(1).

8. Section 1297

The temporary regulations amend Sec. 1.1297-3T to provide that a

shareholder of a former PFIC, within the meaning of Sec. 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 Sec. 1.1291-9 to its section

1297(b)(1) election made by the time and in the manner provided in

Sec. 1.1297-3T(b). If the time for making a section 1297(b)(1)

election, provided in Sec. 1.1297-3T(b), expired before January 2,

1998, a shareholder that applied the rules of section 1291(d)(2)(A) and

Sec. 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 Sec. 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.

Special Analyses

It has been determined that this Treasury Decision is not a

significant regulatory action as defined in Executive Order 12866.

Therefore, a regulatory assessment is not required. 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 the notice of proposed rulemaking on

this subject in the Proposed Rules section of this issue of the Federal

Register.

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.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

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.* * *

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).* * *

Sec. 1.1291-0 [Amended]

Par. 2. Section 1.1291-0 is amended by removing and reserving the

entry for Sec. 1.1291-9(i)(1).

Par. 3. The section heading and introductory text for Sec. 1.1294-0

are added to read as follows:

Sec. 1.1294-0 Table of contents.

This section contains a listing of the headings for Sec. 1.1294-1T.

Par. 4. The section heading and introductory text for Sec. 1.1297-0

are added to read as follows:

Sec. 1.1297-0 Table of contents.

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

Sec. 1.1291-0T [Amended]

Par. 5. Section 1.1291-0T is amended by:

1. Transferring the listing of the section heading and entries for

Sec. 1.1294-1T to new Sec. 1.1294-0.

2. Transferring the listing of the section heading and entries for

Sec. 1.1297-3T to new Sec. 1.1297-0.

3. Removing the section heading and introductory text.

Par. 6. Section 1.1291-1T is added to read as follows:

Sec. 1.1291-1T Taxation of U.S. persons that are shareholders of PFICs

that are 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.

Sec. 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.

Sec. 1.1293-0 Table of contents.

This section contains a listing of the headings for Sec. 1.1293-1T.

Sec. 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.

[[Page 14]]

(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:

Sec. 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

Sec. 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.

(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 Sec. 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 Sec. 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 Sec. 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:

Sec. 1.1295-0 Table of contents.

This section contains a listing of the headings for Secs. 1.1295-1T

and 1.1295-3T.

Sec. 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.

(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.

Sec. 1.1295-3T Retroactive elections (temporary).

(a) In general.

(b) General rule.

(c) Protective Statement.

(1) In general.

(2) Reasonable belief statement.

(3) 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.

[[Page 15]]

(1) In general

(2) Special rules.

(i) Addition of partner to non-TEFRA partnership.

(ii) Change in status from non-TEFRA 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.

(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:

Sec. 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) 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 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 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 Sec. 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

[[Page 16]]

as a QEF for any taxable year of the foreign corporation that the

foreign corporation 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 Sec. 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 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 request 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 Sec. 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 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 Sec. 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 Sec. 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 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.

[[Page 17]]

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

Sec. 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 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 Sec. 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

Sec. 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 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. Box 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. Box 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 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 Sec. 1.1295-1T(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

[[Page 18]]

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 Commissioner 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)(i)(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 closing

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 Sec. 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 Sec. 1.1295-1T for

taxable years beginning after December 31, 1997. A section 1295

election made prior to February 2, 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) Invalidation 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

[[Page 19]]

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 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

Sec. 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 direct or

indirect beneficial owner of PFIC stock (including a beneficial owner

that is a pass through entity) in the chain of ownership between the

shareholder and the PFIC.

Pass through entity is a partnership, S corporation, trust, or

estate.

Shareholder has the same meaning as the term shareholder in

Sec. 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:

Sec. 1.1295-3T Retroactive elections (temporary).

(a) In general. This section prescribes the exclusive rules under

which a shareholder, as defined in Sec. 1.1295-1T(j), may make a

section 1295 election for a taxable year after the election due date,

as defined in Sec. 1.1295-1T(e) (retroactive election). Therefore, a

shareholder may not seek such relief under any other provision of the

law, including Sec. 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

establishes a shareholder's reasonable belief that a foreign

corporation 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 and 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--

[[Page 20]]

(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 and Protective Statement is the person that

makes the section 1295 election, as provided in Sec. 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 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

Commission 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 Sec. 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 Sec. 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 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 Sec. 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 (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

[[Page 21]]

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

shareholder to any other item of income, deduction, or credit for that

year. If the period of limitations for refunds or credits for a taxable

year affected by a 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.

(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 Sec. 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. A foreign corporation is a

PFIC for a taxable year if the foreign corporation satisfies either the

income or asset test of section 1296(a). To determine whether a

shareholder had reasonable belief that the foreign corporation is not a

PFIC under section 1296(a), the shareholder must consider all relevant

facts and circumstances. Reasonable belief may be based on a variety of

factors, including reasonable asset valuations as well as reasonable

interpretations of the applicable provisions of the Code, regulations,

and administrative guidance regarding the direct and indirect ownership

of the income or assets of the foreign corporation, the proper

character of that income or those assets, and similar issues.

Reasonable belief may be based on reasonable predictions regarding

income to be earned and assets to be owned in subsequent years where

qualifications of the foreign corporation as a PFIC for the current

taxable year will depend on the qualification of the corporation as a

PFIC in a subsequent year. Reasonable belief may be based on an

analysis of generally available financial information of the foreign

corporation. To determine whether a shareholder had reasonable belief

that the foreign corporation was not a PFIC, the Commissioner may

consider the size of the shareholder's interest in the foreign

corporation.

(2) Knowledge of law required. Reasonable belief must be based on a

good faith effort to apply the Code, regulations, and related

administrative guidance. Any person's failure to know or apply these

provisions will not form the basis of reasonable belief.

[[Page 22]]

(e) Special rules for qualified shareholders--(1) In general. A

shareholder that is a qualified shareholder, as defined in paragraph

(e)(2) of this section, for a taxable year of the shareholder is not

required to satisfy the reasonable belief requirement of paragraph

(b)(1) of this section or file a Protective Statement to preserve its

ability to make a retroactive election with respect to such taxable

year. Accordingly, a qualified shareholder may make a retroactive

election for any open taxable year in the shareholder's holding period.

The retroactive election will be treated as made in the earliest

taxable year of the shareholder during which the foreign corporation

qualified as a PFIC (including a taxable year ending prior to January

2, 1998) and the shareholder will be treated as a shareholder of a

pedigreed QEF, as defined in Sec. 1.1291-9(j)(2)(ii), provided the

shareholder--

(i) Has been a qualified shareholder with respect to the foreign

corporation for all taxable years of the shareholder included in the

shareholder's holding period during which the foreign corporation was a

PFIC, or in the case of taxable years ending before January 2, 1998,

the shareholder satisfies the criteria of a qualified shareholder, for

all such years; or

(ii) Has been a qualified shareholder, or in the case of taxable

years ending before January 2, 1998 satisfies the criteria of a

qualified shareholder, for all taxable years in its holding period

before it filed a Protective Statement, which Protective Statement is

applicable to all subsequent years, beginning with the first taxable

year in which the shareholder is not a qualified shareholder.

(2) Qualified shareholder. A shareholder will be treated as a

qualified shareholder for a taxable year if the shareholder did not

file a Protective Statement applicable to an earlier taxable year

included in the shareholder's holding period of the stock of the

foreign corporation currently held and--

(i) At all times during the taxable year the shareholder owned,

within the meaning of section 958, directly, indirectly, or

constructively, less than two percent of the vote and value of each

class of stock of the foreign corporation; and

(ii) With respect to the taxable year of the foreign corporation

ending within the shareholder's taxable year, the foreign corporation

or U.S. counsel for the foreign corporation indicated in a public

filing, disclosure statement or other notice provided to U.S. persons

that are shareholders of the foreign corporation (corporate filing)

that the foreign corporation--

(A) Reasonably believes that it is not or should not constitute a

PFIC for the corporation's taxable year; or

(B) Is unable to conclude that it is not or should not be a PFIC

(due to certain asset valuation or interpretation issues, or because

PFIC status will depend on the income or assets of the foreign

corporation in the corporation's subsequent taxable years) but

reasonably believes that, more likely than not, it ultimately will not

be a PFIC.

(3) Exceptions. Notwithstanding paragraph (e)(2)(ii) of this

section, a shareholder will not be treated as a qualified shareholder

for a taxable year of the shareholder if the shareholder knew or had

reason to know that a corporate filing regarding the foreign

corporation's PFIC status was inaccurate, or knew that the foreign

corporation was a PFIC for the taxable year of the foreign corporation

ending with or within such taxable year of the shareholder. For

purposes of this paragraph, a shareholder will be treated as knowing

that a foreign corporation was a PFIC if the principal activity of the

foreign corporation, directly or indirectly, is owning or trading a

diversified portfolio of stock, securities, or other financial

contracts.

(f) Special consent--(1) In general. A shareholder that has not

satisfied the requirements of paragraph (b) or (e) of this section may

request the consent of the Commissioner to make a retroactive election

for a taxable year of the shareholder provided the shareholder

satisfies the requirements set forth in this paragraph (f). The

Commissioner will grant relief under this paragraph (f) only if--

(i) The shareholder reasonably relied on a qualified tax

professional, within the meaning of paragraph (f)(2) of this section;

(ii) Granting consent will not prejudice the interests of the

United States government, as provided in paragraph (f)(3) of this

section;

(iii) The shareholder requests consent under paragraph (f) of this

section before a representative of the Internal Revenue Service raises

upon audit the PFIC status of the corporation for any taxable year of

the shareholder; and

(iv) The shareholder satisfies the procedural requirements set

forth in paragraph (f)(4) of this section.

(2) Reasonable reliance on a qualified tax professional--(i) In

general. Except as provided in paragraph (f)(2)(ii) of this section, a

shareholder is deemed to have reasonably relied on a qualified tax

professional only if the shareholder reasonably relied on a qualified

tax professional (including a tax professional employed by the

shareholder) who failed to identify the foreign corporation as a PFIC

or failed to advise the shareholder of the consequences of making, or

failing to make, the section 1295 election. A shareholder will not be

considered to have reasonably relied on a qualified tax professional if

the shareholder knew, or reasonably should have known, that the foreign

corporation was a PFIC and the availability of a section 1295 election,

or knew or reasonably should have known that the qualified tax

professional--

(A) Was not competent to render tax advice with respect to the

ownership of shares of a foreign corporation; or

(B) Did not have access to all relevant facts and circumstances.

(ii) Shareholder deemed to have not reasonably relied on a

qualified tax professional. For purposes of this paragraph (f)(2), a

shareholder is deemed to have not reasonably relied on a qualified tax

professional if the shareholder was informed by the qualified tax

professional that the foreign corporation was a PFIC and of the

availability of the section 1295 election and related tax consequences,

but either chose not to make the section 1295 election or was unable to

make a valid section 1295 election.

(3) Prejudice to the interests of the United States government--(1)

General rule. Except as otherwise provided in paragraph (f)(3)(ii) of

this section, the Commissioner will not grant consent under paragraph

(f) of this section if doing so would prejudice the interests of the

United States government. The interests of the United States government

are prejudiced if granting relief would result in the shareholder

having a lower tax liability, taking into account applicable interest

charges, in the aggregate for all years affected by the retroactive

election (other than by a de minimis amount) than the shareholder would

have had if the shareholder had made the section 1295 election by the

election due date. The time value of money is taken into account for

purposes of this computation.

(ii) Elimination of prejudice to the interests of the United States

government. Notwithstanding the general rule of paragraph (f)(3)(i) of

this section, if granting relief would prejudice the interests of the

United States government, the Commissioner may, in the Commissioner's

sole discretion, grant consent to make the election provided the

shareholder enters into a closing agreement with the Commissioner that

requires the shareholder to pay an amount sufficient

[[Page 23]]

to eliminate any prejudice to the United States government as a

consequence of the shareholder's inability to file amended returns for

closed taxable years.

(4) Procedural requirements--(i) Filing instructions. A shareholder

requests consent under paragraph (f) of this section to make a

retroactive election by filing with the Office of the Associate Chief

Counsel (International) a ruling request that includes the affidavits

required by this paragraph (f)(4). The ruling request must satisfy the

requirements, including payment of the user fee, for ruling requests

filed with that office.

(ii) Affidavit from shareholder. The shareholder, or a person

authorized to sign a federal income tax return on behalf of the

shareholder, must submit a detailed affidavit describing the events

that led to the failure to make a section 1295 election by the election

due date, and to the discovery thereof. The shareholder's affidavit

must describe the engagement and responsibilities of the qualified tax

professional as well as the extent to which the shareholder relied on

the tax professional. The shareholder must sign the affidavit under

penalties of perjury. An individual who signs for an entity must have

personal knowledge of the facts and circumstances at issue.

(iii) Affidavits from other persons. The shareholder must submit

detailed affidavits from individuals having knowledge or information

about the events that led to the failure to make a section 1295

election by the election due date, and to the discovery thereof. These

individuals must include the qualified tax professional upon whose

advice the shareholder relied, as well as any individual (including an

employee of the shareholder) who made a substantial contribution to the

return's preparation, and any accountant or attorney, knowledgeable in

tax matters, who advised the shareholder with regard to its ownership

of the stock of the foreign corporation. Each affidavit must describe

the individual's engagement and responsibilities as well as the advice

concerning the tax treatment of the foreign corporation that that

individual provided to the shareholder. Each affidavit also must

include the individual's name, address, and taxpayer identification

number, and must be signed by the individual under penalties of

perjury.

(iv) Other information. In connection with a request for consent

under this paragraph (f), a shareholder must provide any additional

information requested by the Commissioner.

(v) Notification of Internal Revenue Service. The shareholder must

notify the branch of the Associate Chief Counsel (International)

considering the request for relief under this paragraph (f) if, while

the shareholder's request for consent is pending, the Internal Revenue

Service begins an examination of the shareholder's return for the

retroactive election year or for any subsequent taxable year during

which the shareholder holds stock of the foreign corporation.

(vi) Who requests special consent under this paragraph (f) and who

enters into a closing agreement. The person that requests consent under

this paragraph (f) is the person that makes the section 1295 election,

as provided in Sec. 1.1295-1T(d). If a shareholder is required to enter

into a closing agreement with the Commissioner, as described in

paragraph (f)(3)(ii) of this section, rules similar to those under

paragraphs (c)(4)(i) (B) through (E) of this section apply for purposes

of determining the person that enters into the closing agreement.

(g) Time for and manner of making a retroactive election--(1) Time

for making a retroactive election--(i) In general. Except as otherwise

provided in paragraph (g)(1)(ii) of this section, a shareholder must

make a retroactive election, in the manner provided in paragraph (g)(2)

of this section, on or before the due date, as extended, for the

shareholder's return--

(A) In the case of a shareholder that makes a retroactive election

pursuant to paragraph (b) or (e) of this section, for the taxable year

in which the shareholder determines or reasonably should have

determined that the foreign corporation was a PFIC; or

(B) In the case of a shareholder that obtains the consent of the

Commissioner pursuant to paragraph (f) of this section for the taxable

year in which such consent is granted.

(ii) Transition rule. A shareholder that files a Protective

Statement for a taxable year described in paragraph (c)(5)(ii) of this

section may make a retroactive election by the due date, as extended,

for the return for the first taxable year ended after January 2, 1998

even if the shareholder determined or should have determined that the

foreign corporation was a PFIC for a year described in paragraph

(c)(5)(ii) of this section at any time on or before January 2, 1998.

(iii) Ownership not required at time retroactive election is made.

The shareholder need not own shares of the foreign corporation at the

time the shareholder makes a retroactive election with respect to the

foreign corporation.

(2) Manner of making a retroactive election. A shareholder that has

satisfied the requirements of paragraph (b) or (e) of this section, or

a shareholder that has been granted consent under paragraph (f) of this

section, must make a retroactive election in the manner provided in

Form 8621 for making a section 1295 election, and must attach Form 8621

to an amended return for the later of the retroactive election year or

the earliest open taxable year of the shareholder. The shareholder also

must file an amended return for each of its subsequent taxable years

affected by the retroactive election. In each amended return the

shareholder must redetermine its income tax liability for that year to

take into account the assessment of PFIC related taxes. If the period

of limitations for the assessment of taxes for a taxable year affected

by the retroactive election has expired except to the extent the waiver

of limitations, described in paragraph (c)(4) of this section, has

extended such period, no adjustments, other than consequential changes,

may be made to any other items of income, deduction, or credit in that

year. In addition, the shareholder must pay all taxes and interest

owing by reason of the PFIC and QEF status of the foreign corporation

in those years (except to the extent a section 1294 election extends

the time to pay the taxes and interest). A shareholder that filed a

Protective Statement must attach to Form 8621 filed with each amended

return a representation that the shareholder, until the taxable year in

which it determined or reasonably should have determined that the

foreign corporation was a PFIC, reasonably believed, within the meaning

of paragraph (d) of this section, that the foreign corporation was not

a PFIC in the taxable year for which the amended return is filed, and

in all other taxable years to which the Protective Statement applies. A

shareholder that entered into a closing agreement must comply with the

terms of that agreement, as provided in paragraph (f)(3)(ii) of this

section, to eliminate any prejudice to the United States government's

interests, as described in paragraph (f)(3) of this section.

(3) Who makes the retroactive election. The person that makes the

retroactive election is the person that makes the section 1295

election, as provided in Sec. 1.1295-1T(d). A partner, shareholder, or

beneficiary for which a pass through entity, as described in paragraphs

(c)(4)(i)(B) through (D) of this section, filed a Protective Statement

may make a retroactive election, if the pass through entity completely

terminates its business or otherwise ceases to exist.

(4) Other elections--(i) Section 1291(d)(2) election. If the

foreign

[[Page 24]]

corporation for which the shareholder makes a retroactive election will

be treated as an unpedigreed QEF, as defined in Sec. 1.1291-

9(j)(2)(iii), with respect to the shareholder, the shareholder may make

an election under section 1291(d)(2) to purge its holding period of the

years or parts of years before the effective date of the retroactive

election. If the qualification date, within the meaning of Sec. 1.1291-

9(e) or 1.1291-10(e), falls in a taxable year for which the period of

limitations has expired, the shareholder may treat the first day of the

retroactive election year as the qualification date. The shareholder

may make a section 1291(d)(2) election at the time that it makes the

retroactive election, but no later than two years after the date that

the amended return in which the retroactive election is made is filed.

For the requirements for making a section 1291(d)(2) election, see

Secs. 1.1291-9 and 1.1291-10.

(ii) Section 1294 election. A shareholder may make an election

under section 1294 to extend the time for payment of tax on the

shareholder's pro rata shares of the ordinary earnings and net capital

gain of the foreign corporation reported in the shareholder's amended

return, and section 6621 interest attributable to such tax, but only to

the extent the tax and interest are attributable to earnings that have

not been distributed to the shareholder. The shareholder must make a

section 1294 election for a taxable year at the time that it files its

amended return for that year, as provided in paragraph (g)(1) of this

section. For the requirements for making a section 1294 election, see

Sec. 1.1294-1T.

(h) Effective date. The rules of this section are effective as of

January 2, 1998.

Par. 13. Section 1.1297-3T(c) is added to read as follows:

Sec. 1.1297-3T Deemed sale election by a United States person that is

a shareholder of a passive foreign investment company (temporary).

* * * * *

(c) Application of deemed dividend election rules.--(1) In general.

A shareholder of a former PFIC, within the meaning of Sec. 1.1291-

9(j)(2)(iv), that was a controlled foreign corporation, within the

meaning of section 957(a) (CFC), during its last taxable year as a PFIC

under section 1296(a), may apply the rules of section 1291(d)(2)(B) and

Sec. 1.1291-9 to an election under section 1297(b)(1) and this section

made by the time and in the manner provided in paragraph (b) of this

section.

(2) Transition rule. If the time for making an election under this

section, as provided in paragraph (b) of this section, expired before

January 2, 1998, a shareholder that applied rules similar to the rules

of section 1291(d)(2)(A) and Sec. 1.1291-10 to an election under this

section made with respect to a corporation that was a CFC during its

last taxable year as a PFIC under section 1296(a) may file an amended

return for the taxable year that includes the termination date, as

defined in paragraph (a) of this section, and apply the rules of

section 1291(d)(2)(B) and Sec. 1.1291-9 at any time before the

expiration of the period of limitations for the assessment of taxes for

that taxable year.

(3) Effective date. The rules of this paragraph are effective as of

January 2, 1998.

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

Par. 14. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 15. In Sec. 602.101, paragraph (c) is amended by adding

entries in numerical order to the table to read as follows:

Sec. 602.101 OMB Control numbers.

* * * * *

(c) * * *

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Current OMB

CFR part of section where identified and described control No.

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* * * * *

1.1295-1T................................................. 1545-1555

1.1295-3T................................................. 1545-1555

* * * * *

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Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

Approved: December 15, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97-33985 Filed 12-31-97; 8:45 am]

BILLING CODE 4830-01-P