Td 8178

Search - 6 Results - TD 8178

Page 1 of 21

T.D. 8178
Treasury Decisions
Copyright 2007 LexisNexis Group, All Rights Reserved
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
53 FR 6770
Income Taxes; Passive Foreign Investment Companies
T.D. 8178
DATE: March 2, 1988
ACTION: Temporary regulations.
SUMMARY: This document contains temporary income tax regulations that provide guidance to
passive foreign investment companies and their shareholders that are United States persons about the
time, manner and other requirements for making certain elections. These elections were enacted by
the Tax Reform Act of 1986. The text of the temporary regulations set forth in this document also
serves as the text of the proposed regulations cross-referenced in the notice of proposed rulemaking in
this issue of the Federal Register.
DATES:
DATE: Effective for taxable years beginning after December 31, 1986.
ADDRESSES:
FOR FURTHER INFORMATION CONTACT: Gayle E. Novig of the Office of the Associate Chief Counsel
(International), within the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue
NW., Washington, DC 20224 (Attention: CC:LR:T) (CC:INTL-655-87) (202-634-5423, not a toll free
number).
SUPPLEMENTARY INFORMATION:
Background
This document contains Temporary Income Tax Regulations (26 CFR Part 1) under sections 1291(d)
(2), 1294, 1295, and 1297(b)(1) of the Internal Revenue Code of 1986. These provisions were added
to the Internal Revenue Code of 1986 by section 1235 of the Tax Reform Act of 1986 (Pub. L. 99-514).
The temporary regulations are effective for taxable years beginning after 1986. However, these
regulations are not intended to address comprehensively the issues raised by sections 1291, 1294,
1295, and 1297 of the Code.
Need for Temporary Guidance
The temporary regulations provided by this document will remain in effect until superseded by final
regulations on these elections. Passive foreign investment companies and their shareholders wishing to
make the elections in this Treasury decision for their first taxable year beginning after 1986 have an
immediate need for guidance with respect to the time and manner of making the elections. For this
reason, it is impracticable to issue this Treasury decision with notice and public procedure under
subsection (b) of section 553 of Title 5 of the United States Code or to issue the decision subject to the
effective date limitation of subsection (d) of that section.
Explanation of Provisions

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 2 of 21

General
The Tax Reform Act of 1986 established special rules for the taxation of U.S. persons that are
shareholders of passive foreign investment companies (PFICs). For taxable years beginning after
December 31, 1986, a foreign corporation will be classified as a PFIC if either 75 percent or more of its
gross income for the taxable year is passive, or 50 percent or more of the average value of its assets
for the taxable year produce passive income or are held for the production of passive income. Subject
to certain exceptions, passive income for these purposes generally is foreign personal holding company
income as defined in section 954(c) of the Internal Revenue Code.
There are two types of PFICs. Absent an election to be treated as a qualified electing fund (QEF), a
PFIC is considered a "nonqualified fund." U.S. persons that are shareholders of nonqualified funds are
subject to special ordinary income treatment and a deferred tax amount upon disposition of the stock
and receipt of certain distributions. If, however, a PFIC makes the election under section 1295 to be a
QEF, its shareholders that are U.S. persons will be taxed currently on their respective shares of the
QEF's earnings.
Statutory Provisions
Election to be a Qualified Electing Fund
A PFIC may make the election under section 1295 to be a QEF for any taxable year. To be effective for
a particular taxable year, the election must be filed with the Internal Revenue Service Center in
Philadelphia before the 15th day of the third month of the following taxable year. The election, once
made, applies to the year for which first effective and all subsequent taxable years that the electing
company is a PFIC. The election may be revoked only with the consent of the Secretary. In addition, to
be a QEF, the PFIC must comply with requirements prescribed by the Secretary for determining its
ordinary earnings and net capital gain for each taxable year, for reporting the U.S. ownership of its
stock, and for other purposes necessary to carry out the objectives of the PFIC provisions.
QEF Shareholder Election to Recognize Gain
U.S. persons that are shareholders of a QEF are taxed under section 1293 on their pro rata shares of
the QEF's annual ordinary earnings and net capital gain. If the QEF was a nonqualified fund in a prior
taxable year included in the shareholder's holding period, the U.S. person also may be taxable under
section 1291 on dispositions of the QEF stock and receipt of certain distributions. To limit the
shareholder's taxation to section 1293, the shareholder may make the election under section 1291(d)
(2) to mark the stock to market as of the first day of the QEF's first taxable year as a QEF. A U.S.
person making this election is deemed to have sold the stock held in the QEF on that day for its fair
market value. The deemed sale is taxable as a disposition subject to the special tax rules of section
1291. Gain, but not loss, realized on the deemed sale will be recognized. The shareholder's basis in the
stock will be adjusted for any gain recognized, and the shareholder's holding period shall thereafter be
treated as beginning on the date of the deemed sale. Thereafter, the shareholder will be taxable only
under section 1293 with respect to the subsequent earnings derived from the investment in the QEF.
Election to Extend Time for Payment of Tax
The U.S. investor in a QEF is currently taxed on the undistributed earnings of the QEF; however,
section 1294 enables the shareholder to elect annually to defer payment of the tax on those earnings,
subject to an interest charge. The electing shareholder may terminate the election at any time by
paying the tax and interest due. Otherwise, the election automatically terminates upon the occurrence
of an event described in section 1294(c).
Election to Purge Stock of PFIC Taint
If, in a particular taxable year, a shareholder owns stock in a foreign corporation which qualifies as a
PFIC under section 1296, the stock will retain its character as PFIC stock in subsequent taxable years
unless the PFIC is a QEF for the shareholder's entire holding period. An election is available under
section 1297(b)(1), however, which allows a shareholder to purge the PFIC taint attributable to stock
of a corporation that was a PFIC but no longer qualifies as such under the passive income or passive

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 3 of 21

asset test of section 1296 (former PFIC). Unless the election is made, the shareholder will continue to
be taxable pursuant to section 1291 even after the corporation ceases to meet the PFIC definitional
test of section 1296. The election effects a deemed sale of the stock and only applies in circumstances
in which the PFIC was not a qualified electing fund at some time during the electing shareholder's
holding period. The electing shareholder is treated as having sold the stock in the former PFIC on the
last day of the former PFIC's last taxable year during which it met the PFIC definitional test. The
deemed sale is treated as a disposition for purposes of section 1291 and, therefore, is subject to the
deferred tax amount defined in section 1291(c).
Explanation of Temporary Regulations
The temporary regulations provide the time, manner and other requirements for making the elections
under sections 1291(d)(2), 1294, 1295, and 1297(b)(1).
Election to be a Qualified Electing Fund
Section 1.1295-1T of the temporary regulations prescribes the time and manner for making the QEF
election and the requirements for continued QEF qualification. The temporary regulations provide that
the PFIC must file its QEF election with the Philadelphia Service Center before the 15th day of the third
month following the taxable year for which the election is made. The temporary regulations permit a
PFIC whose post-1986 short taxable year ended before December 31, 1987 to make the election any
time before March 15, 1988. The QEF election will not be available to PFICs with any bearer shares. As
part of the election, the PFIC must provide certain information, including the total ordinary earnings
and net capital gain for the year of the election and, in certain cases, the fair market of a share of its
stock as of the first day of the election year. However, any PFIC which must file its election statement
before May 15, 1988, will be able to amend and supplement the information provided in its election
statement as well as extend the time to satisfy the other election requirements in § 1.1295-1T(b)
described below by June 15, 1988.
The temporary regulations also require the PFIC to notify its shareholders of the daily amount of
ordinary earnings and net capital gain of the PFIC deemed earned on a share of stock during the
taxable year. However, if the number of outstanding shares of stock in the PFIC changed at any time
during the year, the PFIC must provide the shareholders a schedule of the per share amounts of
ordinary earnings and net capital gain of the PFIC for each day during the taxable year. The PFIC must
send the shareholder notification and request for certification by the 15th day of the third month
following each taxable year to which the election applies. However, the date for sending shareholder
notification and request for certification statements is extended until June 15, 1988 for elections filed
before March 15, 1988 under § 1.1295-1T(b)(1)(iii) of the temporary regulations.
The shareholder notification and certification statement will require certain shareholders of record that
hold the stock for their own benefit to complete the certification statement and return it to the PFIC.
The shareholder notification and request for certification statement also will advise certain types of
shareholders of record to notify their owners, or the persons on whose behalf they hold the stock, of
their pro rata shares of the earnings of the PFIC. These shareholders also must be advised to request
the indirect owners to report their status as U.S. persons to the PFIC. Only U.S. persons that are direct
or indirect shareholders of the PFIC are required to certify their status to the PFIC. The temporary
regulations provide that failure of a shareholder to comply with the request for certification will not
invalidate the QEF election.
The temporary regulations require the QEF to provide the Internal Revenue Service, by the 15th day of
the ninth month following each taxable year to which the election applies, the names, addresses and
taxpayer identification numbers of U.S. persons obtained through certification, and their pro rata
shares of the ordinary earnings and net capital gain. For taxable years after the year of the election,
this information will be required as part of the annual report to be filed by the QEF by the 15th day of
the ninth month following each year to which the election applies. The annual report will be similar to
the election statement.
The temporary regulations also require a QEF to amend the earnings information filed with the Internal
Revenue Service and sent to its shareholders at any time that a recalculation of the ordinary earnings
and net capital gain of the QEF is necessary.

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 4 of 21

The temporary regulations under § 1.1295-lT(b)(3) require the QEF to appoint a person resident in the
United States as the QEF's authorized representative in the United States for tax administrative
purposes. Section 1.1295-1T(b)(4) requires the QEF to maintain permanent books of account, records
and other documents that are necessary to verify the reported amounts of ordinary income and capital
gain, to maintain ledgers of all shareholders of record for each year to which the election applies, to
keep copies of such documents in the United States, and to make the documents available for
inspection by Internal Revenue Service personnel.
Section 1.1295.lT(b)(9) provides that if the electing corporation was a nonqualified fund during a post1986 taxable year prior to the taxable year for which the section 1295 election is made, it must
determine, for purposes of the shareholder election under section 1291(d)(2), the fair market value of
its stock on the first day of its first taxable year as a QEF (the valuation date) according to the rules
specified in § 1.1295-lT(b)(9) (i), and (ii). This requirement does not apply to a foreign corporation
that makes the election for its first taxable year during which it qualifies as a PFIC. A PFIC required to
make the fair market value determination must provide this information to those persons that were its
shareholders on the valuation date.
The section 1295 election may be revoked by the PFIC but only with the consent of the Commissioner.
The Commissioner's determination will take into account the enactment of technical corrections to the
Tax Reform Act of 1986 after the PFIC made the election, as well as provisions of PFIC regulations,
published after the PFIC made the election.
QEF Shareholder Election to Recognize Gain.
Section 1.1291-10T specifies the time and manner for making the election under section 1291(d)(2) of
the Code to treat the stock of a PFIC as sold on the first day on which the PFIC is a QEF. This election
only applies to a U.S. person that held such stock in the QEF when it was a nonqualified fund. The
election may be made by a shareholder that may realize either a gain or a loss on the deemed sale
(although the loss will not be recognized). Section 1.1291-10T(c) provides that the shareholder may
make the election only with respect to the taxable year that includes the first day of the QEF's first
taxable year as a QEF. Section 1.1291-10T(d) provides that, in order to make the election under
section 1291(d)(2), the shareholder generally must pay the tax arising under section 1291 by the due
date (determined without extensions) of the return for the shareholder's taxable year that includes the
first day of the QEF's first taxable year as a QEF. If the shareholder files the election after the due
date, the electing shareholder will have to pay the tax on the gain included in income, the deferred tax
amount, and the interest for the underpayment of tax pursuant to section 6601.
The temporary regulations provide rules for direct shareholders making the election under section 1291
(d)(2). Guidance for indirect shareholders wishing to make the election will be provided at a later time.
Election to Extend Time for Payment of Tax
Section 1.1294-1T specifies the time and manner for making the annual election under section 1294 to
extend the time for payment of the tax liability which is attributable to the undistributed earnings of
the QEF, included in income under section 1293, for the taxable year of the QEF that ended during the
taxable year of the shareholder. The tax liability is defined in § 1.1294-1T(f) as the excess of the tax
imposed under chapter 1 of the Code for the taxable year over the tax that would be imposed for the
taxable year without regard to the inclusion in income under section 1293 of undistributed earnings.
The electing shareholder will be required to state in the section 1294 election the amount or ordinary
earnings and net capital gain of the QEF included in the income of the shareholder for the year and the
amount of the tax liability, payment of which is being deferred by reason of the election under section
1294. An extension of time to pay tax terminates upon the occurrence of any of the events listed in §
1.1294-1T(e). These events include receipt of earnings to which the election is attributable, transfer or
pledge of the stock with respect to the stock with respect to which the section 1294 election applies, a
loan, pledge or guarantee by the QEF to the electing shareholder or to a person related to the
shareholder, cessation of the QEF's status as a QEF or as a PFIC, or a determination by the District
Director pursuant to section 1294(c)(3) that collection of the tax is in jeopardy.
83Election to Purge Stock of PFIC Taint

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 5 of 21

11Section 1.1297-3T provides the time and manner for making the election under section 1297(b)(1)
of the Code to treat the PFIC stock as sold on the last day of the last taxable year during which it was
a PFIC. Thereafter, the foreign corporation will not be treated as a PFIC in the hands of the
shareholder. The shareholder makes the election by filing an amended tax return within three years
after the due date, as extended, of the shareholder's tax return for the taxable year that includes the
date of the deemed sale. The shareholder must describe in the election the manner in which the former
PFIC lost the characteristics of a PFIC. The electing shareholder will be liable for interest for
underpayment of tax for the year of the deemed sale.
11The temporary regulations provide rules for direct shareholdes making the election under section
1297(b)(1). Guidance for indirect shareholders wishing to make the election will be provided at a later
time.
84Special Analyses
11It has been determined that this temporary regulation is not a major rule as defined in Executive
Order 12291. Therefore, a Regulatory Impact Analysis is not required. A general notice of proposed
rule is not required by 5 U.S.C. 553 for temporary regulations. Accordingly, the temporary regulations
do not constitute regulations subject to the Regulatory Flexibility Act (5 U.S.C. Chapter 6).
84Paperwork Reduction Act
11The collection of information requirements contained in this regulation have been submitted to the
Office of Management and Budget (OMB) in accordance with the requirements of the Paperwork
Reduction Act of 1980. These requirements have been approved by OMB under control number 15451028.
Drafting Information
The principal author of these temporary regulations is Gayle E. Novig of the Office of the Associate
Chief Counsel (International), within the Office of Chief Counsel, Internal Revenue Service. However,
personnel from other offices of the Internal Revenue Service and Treasury Department participated in
developing the regulations, on matters of both substance and style.
List of Subjects
26 CFR 1.1201-1 Through 1.1297-1
Income taxes, Capital gains and loses, Recapture and passive foreign investment companies.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR Part 1 is amended as follows:
Income Tax Regulations
Paragraph 1. The authority for 26 CFR Part 1 continues to read in part:
Authority: 26 U.S.C. 7805. * * * Sections 1.1291-10T, 1.1294-1T, 1.1295-1T, and 1.1297-3T also
issued, respectively, under the authority of 26 U.S.C. 1291(d)(2), 1294, 1295, and 1297(b)(1).
Par. 2. New §§ 1.1291-0T, 1.1291-0T, 1.1294-1T, 1.1295-1T, and 1.1297-3T are added immediately
following § 1.1287-1.
The added sections read as follows:

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 6 of 21

§ 1.1291-0T Passive Foreign Investment Companies. Table of contents (Temporary).
§ 1.1291-0T Election by a United States person to recognize gain in a qualified electing fund
(a) Purpose and scope
(b) Election to recognize gain
(1) In general
(2) Qualification date
(3) Exception
(c) Time for making the election
(d) Manner of making the election
(1) In general
(2) Information to be included in the election
(e) Adjustment to basis; treatment of holding period
§ 1.1294-1T Election to extend the time for payment of tax on undistributed earnings of a qualified
electing fund
(a) Purpose and scope
(b) Election to extend time for payment of tax
(1) In general
(2) Exception
(3) Undistributed earnings
(i) In general
(ii) Effect of loan, pledge or guarantee
(c) Time for making the election
(1) In general
(2) Exception
(d) Manner of making the election
(1) In general
(2) Information to be included in the election
(e) Termination of the extension
(f) Undistributed PFIC earnings tax liability
(g) Authority to require a bond

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 7 of 21

(h) Annual reporting requirement
§ 1.1295-1T Election by a passive foreign investment company to be a qualified electing fund
(a) In general
(b) Election requirements
(1) Time for making the election
(i) In general
(ii) Exception for elections for post-1986 years ended before 12/31/87
(iii) Curing an election made before 5/15/88
(2) Manner of making the election
(i) In general
(ii) Information to be included in the election statement
(3) Appointment of U.S. agent
(4) Books and records
(5) Annual shareholder notification and request for certification of U.S. ownership
(i) In general
(ii) The notification of PFIC information and request for shareholder certification
(6) Annual reporting by the PFIC to the Internal Revenue Service
(7) Amendment of earnings information
(8) Taxpayer identification number
(9) Fair market value determination by certain companies
(i) Companies other than open-end investment companies
(ii) Open-end investment companies
(c) Revocability of election
(1) In general
(2) Failure to obtain shareholder certification
§ 1.1297-3T Deemed sale election by a United States person that is a shareholder of a passive foreign
investment company
(i) In general
(b) Time and manner for making the election
(1) In general
(2) Information to be included in the election

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 8 of 21

(3) Adjustment to basis; treatment of holding period
§ 1.1291-10T Election by a United States person to recognize gain in a qualified electing fund
(Temporary).
(a) Purpose and scope. This section provides rules for making the election under section 1291(d)(2).
Under that section, a U.S. person may elect to recognize gain with respect to stock in a qualified
electing fund (QEF) held on the first day of the QEF's first taxable year during which it is a QEF. In
general, a QEF is a foreign coporation that is a passive foreign investment company (PFIC), as defined
in section 1296, and that has made the election under section 1295. For rules concerning the election
by a PFIC under section 1295, see § 1.1295-1T.
(b) Election to recognize gain -- (1) In general. A U.S. person may elect to recognize gain under the
provisions of this § 1.1291-10T if such person was a shareholder of a QEF on the qualification date. A
person that makes such an election shall be treated as having sold on the qualification date for its fair
market value stock of the QEF that the person held on that date. The deemed sale is taxed as a
disposition pursuant to section 1291. Under that section, the gain is considered earned pro rata over
the shareholder's holding period in the stock, and is taxed as ordinary income. The tax on the gain
attributable to post-1986 taxable years during which the corporation is a PFIC is based on the value of
tax deferral and includes an interest charge. An election may be made by a shareholder that would
realize a loss on the deemed sale. Any loss realized on the deemed sale may not be recognized.
(2) Qualification date. The qualification date with respect to any shareholder of a QEF is the first day of
the QEF's first taxable year as a QEF.
(3) Exception. This election does not pertain to a shareholder that held stock in a PFIC which was a
QEF for all of the PFIC's taxable years beginning after 1986 during which it qualified as a PFIC and that
are included in whole or in part in the shareholder's holding period. See section 1291(d)(1).
(c) Time for making the election. Except as provided below, an election under this § 1.1291-10T must
be made with the filing of the electing shareholder's tax return for the taxable year which includes the
qualification date. The election may be made by filing an amended tax return within three years of the
due date, as extended, for the shareholder's tax return for the taxable year which includes the
qualification date.
(d) Manner of making the election -- (1) In general. The election shall be made by filing Form 8621 or
a statement containing the information and representations required by paragraph (d)(2) of this
section, reporting the gain on the income tax return as required by section 1291(a)(2), and by paying
the tax on the gain as required by section 1291 (including the payment of the deferred tax amount
required under sections 1291(a)(1)(C) and 1291(c)). The electing shareholder that makes the election
under this section after the due date of the return (determined without extensions) shall pay interest,
pursuant to section 6601, on the underpayment of tax for the taxable year that includes the
qualification date.
(2) Information to be included in the election. If a statement is used in lieu of Form 8621, the
statement should be identified, in a heading, as an election under section 1291(d)(2). The statement
must contain the following information and representations:
(i) The name, address and taxpayer identification number of the electing shareholder;
(ii) The name, address and taxpayer identification number of the QEF, the stock of which is the subject
of the election;
(iii) A statement that the shareholder is making the election under section 1291(d)(2);
(iv) A representation that the person making the election was a shareholder in the QEF on the
qualification date;
(v) The qualification date;

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 9 of 21

(vi) A schedule of the shares held by the electing shareholder in the QEF on the qualification date,
listing the date(s) of acquisition, the number of shares acquired on each date listed, and the electing
shareholder's tax basis in each of those shares;
(vii) The fair market value of the stock in the QEF as of the qualification date, as provided to the
electing shareholder by the QEF pursuant to § 1.1291-1T(b)(5); and
(viii) A schedule showing the computation of the gain recognized on the deemed sale, and the
calculation of the deferred tax amount, as defined in section 1291(c).
(e) Adjustment to basis; treatment of holding period. An electing shareholder that recognizes gain on
the deemed sale shall increase its adjusted basis in the stock by the amount of gain recognized. An
electing shareholder shall not adjust the basis in stock with respect to which the shareholder realized a
loss on the deemed sale. An electing shareholder thereafter shall treat its holding period in the stock,
for purposes of sections 1291 through 1297, as beginning on the qualification date without regard to
whether it recognized gain on the deemed sale; for purposes of section 1223, the holding period in the
stock in the QEF shall include the period prior to the deemed sale.
§ 1.1294-1T Election to extend the time for payment of tax on undistributed earnings of a qualified
electing fund (Temporary).
(a) Purpose and scope. This section provides rules for making the annual election under section 1294.
Under that section, a U.S. person that is a shareholder in a qualified electing fund (QEF) may elect to
extend the time for payment of its tax liability which is attributable to its share of the undistributed
earnings of the QEF. In general, a QEF is a passive foreign investment company (PFIC), as defined in
section 1296, that makes the election under section 1295. Under section 1293, a U.S. person that
owns, or is treated as owning, stock of a QEF at any time during the taxable year of the QEF shall
include in gross incme, as ordinary income, its pro rata share of the ordinary earnings of the QEF for
the taxable year and, as long-term capital gain, its pro rata share of the net capital gain of the QEF for
the taxable year. The shareholder's taxable year in which or with which the taxable year of the QEF
ends.
(b) Election to extend time for payment -- (1) In general. A U.S. person that is a shareholder of a QEF
on the last day of the QEF's taxable year may elect under section 1294 to extend the time for payment
of that portion of its tax liability which is attributable to the inclusion in income pursuant to section
1293 of the shareholder's share of the QEF's undistributed earnings. The election under section 1294
may be made only with respect to undistributed earnings, and interest is imposed under section 6601
on the amount of the tax liability which is subject to the extension. This interest must be paid on the
termination of the election.
(2) Exception. An election under this § 1.1294-1T cannot be made for a taxable year of the
shareholder if any portion of the QEF's earning is includible in the gross income of the shareholder for
such year under either section 551 (relating to foreign personal holding companies) or section 951
(relating to controlled foreign corporations).
(3) Undistributed earnings -- (i) In general. For purposes of this § 1.1294-1T the term "undistributed
earnings" means the excess, if any, of the amount includible in gross income by reason of section 1293
(a) for the shareholder's taxable year (the includible amount) over the sum of (A) the amount of any
distribution to the shareholder during the QEF's taxable year and (B) the portion of the includible
amount that is attributable to stock in the QEF that the shareholder transferred or otherwise disposed
of before the end of the QEF's year. For purposes of this paragraph, a distribution will be treated as
made from the most recently accumulated earnings and profits.
(ii) Effect of a loan, pledge or guarantee. A loan, pledge, or guarantee described in § 1.1294-1T(e) (2)
or (4) will be treated as a distribution of earnings for purposes of paragraph (b)(3)(i)(A). If earnings
are treated as distributed in a taxable year by reason of a loan, pledge or guarantee described in §
1.1294-1T(e) (2) or (4), but the amount of the deemed distribution resulting therefrom was less than
the amount of the actual loan by the QEF (or the amount of the loan secured by the pledge or
guarantee), earnings derived by the QEF in a subsequent taxable year will be treated as distributed in

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 10 of 21

such subsequent year to the shareholder for purposes of paragraph (b)(3)(i)(A) by virtue of such loan,
but only to the extent of the difference between the outstanding principal balance on the loan in such
subsequent year and the prior years' deemed distributions resulting from the loan. For this purpose,
the outstanding principal balance on a loan in a taxable year shall be treated as equal to the greatest
amount of the outstanding balance at any time during such year.
Example (1). (i) Facts. FC is a PFIC that made the election under section 1295 to be a QEF for its
taxable year beginning January 1, 1987. S owned 500 shares, or 50 percent, of FC throughout the first
six months of 1987, but on June 30, 1987 sold 10 percent, or 50 shares, of the FC stock that it held.
FC had $100,000x of ordinary earnings but no net capital gain in 1987. No part of FC's earnings in
includible in S's income under either section 551 or 951. FC made no distributions to its shareholders
in 1987. S's pro rata share of income is determined by attributing FC's income ratably to each day in
FC's year. Accordingly, FC's daily earnings are $274x ($100,000x/365). S's share of the earnings of FC
is $47,484x, determined as follows.
FC's daily earnings X number of days percentage held by S X percentage of ownership in FC.
Accordingly, S's pro rata share of FC's earnings for the first six months of FC's year deemed
earned while S held 50 percent of FC's stock is $24,797x ($274x X 181 days X 50%). S's pro
rata share of FC's earnings for remainder of FC's year deemed earned while S held 45
percent of FC's stock is $22,687x ($274x X 184 days X 45%). Therefore, S's total share of
FC's earnings to be included in income under section 1293 is $47,484x ($24,797x +
$22,687x).
(ii) Election. S intends to make the election under section 1294 to defer the payment of its tax liability
that is attributable to the undistributed earnings of FC. The amount of current year undistributed
earnings as defined in § 1.1294-1T(b)(3) with respect to which S can make the election is the excess
of S's inclusion in gross income under section 1293(a) for the taxable year over the sum of (1) the
cash and other property distributed to S during FC's tax year out of earnings included in income
pursuant to section 1293(a), and (2) the earnings attributable to stock disposed of during FC's tax
year. Because S sold 10 percent, or 50 shares, of the FC stock that it held during the first six months
of the year, 10 percent of its share of the earnings for that part of the year, which is $2,480x
($24,797x X 10%), is attributable to the shares sold. S therefore cannot make the election under
section 1294 to extend the time for payment of its tax liability on that amount. Accordingly, S can
make the election under section 1294 with respect to its tax on $45,004x ($47,484x less $2,480x),
which is its pro rata share of FC's earnings, reduced by the earnings attributable to the stock disposed
of during the year.
Example (2). (i) Facts. The facts are the same as in Example (1) with the following exceptions. S did
not sell any FC stock during 1987. Therefore, because S held 50 percent of the FC stock throughout
1987, S's pro rata share of FC's ordinary earnings was $50,000x, no part of which was includible in S's
income under either section 551 or 951. There were no actual distributions of earnings to S in 1988.
On December 31, 1987, S pledged the FC stock as security for a bank loan of $75,000x. The pledge is
treated as a disposition of the FC stock and therefore a distribution of S's share of the undistributed
earnings of FC up to the amount of the loan principal. S's entire share of the undistributed earnings of
FC are deemed distributed as a result of the pledge of the FC stock. S therefore cannot make the
election under section 1294 to extend the time for payment of its tax liability on its share of FC's
earnings for 1987.
(ii) Deemed distribution. In 1988, FC has ordinary earnings of $100,000x but no net capital gain. S's
pro rata share of FC's 1988 ordinary earnings was $50,000x. S's loan remained outstanding
throughout 1988; the highest loan balance during 1988 was $74,000x. Of S's share of the ordinary
earnings of FC of $50,000x, $24,000x is deemed distributed to S. This is the amount by which the
highest loan balance for the year ($74,000x) exceeds the portion of the undistributed earnings of FC
deemed distributed to S in 1987 by reason of the pledge ($50,000x). S may make the election under
section 1294 to extend the time for payment of its tax liability of $26,000x, which is the amount by
which S's includible amount for 1988 exceeds the amount deemed distributed to S during 1988.
(c) Time for making the election -- (1) In general. An election under this § 1.1294-1T may be made for
any taxable year in which a shareholder reports income pursuant to section 1293. Except as provided

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 11 of 21

in paragraph (c)(2), the election shall be made by the due date, as extended, of the tax return for the
shareholder's taxable year for which the election is made.
(2) Exception. An election under this section may be made within 60 days of receipt of notification
from the QEF of the shareholder's pro rata share of the ordinary earnings and net capital gain if
notification is received after the time for filing the election provided in paragraph (c)(1) (and requires
the filing of an amended return to report income pursuant to section 1293). If the notification reports
an increase in the shareholder's pro rata share of the earnings previously reported to the shareholder
by the QEF, the shareholder may make the election under this paragraph (c)(2) only with respect to
the amount of such increase.
(d) Manner of making the election -- (1) In general. A shareholder shall make the election by (i)
attaching to its return for the year of the election Form 8621 or a statement containing the information
and representations required by this section and (ii) filing a copy of Form 8621 or the statement with
the Internal Revenue Service Center, P.O. Box 21086, Philadelphia, Pennsylvania 19114.
(2) Information to be included in the election statement. If a statement is used in lieu of Form 8621,
the statement should be identified, in a heading, as an election under section 1294 of the Code. The
statement must include the following information and representations:
(i) The name, address, and taxpayer identification number of the electing shareholder and the taxable
year of the shareholder for which the election is being made;
(ii) The name, address and taxpayer identification number of the QEF if provided to the shareholder;
(iii) A statement that the shareholder is making the election under section 1294 of the Code;
(iv) A schedule containing the following information:
(A) The ordinary earnings and net capital gain for the current year included in the shareholder's
income under section 1293;
(B) The amount of cash and other property distributed by the QEF during its taxable year with respect
to stock held directly or indirectly by the shareholder during that year, identifying the amount of such
distributions that is paid out of current earnings and profits and the amount paid out of each prior
year's earnings and profits; and
(C) The undistributed PFIC earnings tax liability (as defined in paragraph (f) of this section) for the
taxable year, payment of which is being deferred by reason of the election under section 1294;
(v) The number of shares of stock held in the QEF during the QEF's taxable year which gave rise to the
section 1293 inclusion and the number of such shares transferred, deemed transferred or otherwise
disposed of by the electing shareholder before the end of the QEF's taxable year, and the data of
transfer; and
(vi) The representations of the electing shareholder that -(A) No part of the QEF's earnings for the taxable year is includible in the electing shareholder's gross
income under either section 551 or 951 of the Code;
(B) The election is made only with respect to the shareholder's pro rata share of the undistributed
earnings of the QEF; and
(C) The electing shareholder, upon termination of the election to extend the date for payment, shall
pay the undistributed PFIC earnings tax liability attributable to those earnings to which the termination
applies as well as interest on such tax liability pursuant to section 6601. Payment of this tax and
interest must be made by the due date (determined without extensions) of the tax return for the
taxable year in which the termination occurs.
(e) Termination of the extension. The election to extend the date for payment of tax will be terminated

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 12 of 21

in whole or in part upon the occurrence of any of the following events:
(1) The QEF's distribution of earnings to which the section 1294 extension to pay tax is attributable;
the extension will terminate only with respect to the tax attributable to the earnings that were
distributed.
(2) The electing shareholder's transfer of stock in the QEF (or use thereof as security for a loan) with
respect to which an election under this § 1.1294-1T was made. The election will be terminated with
respect to the undistributed earnings attributable to the shares of the stock transferred. In the case of
a pledge of the stock, the election will be terminated with respect to undistributed earnings equal to
the amount of the loan for which the stock is pledged. ings -Folios: 414-146 -Date: 2-29-88 Subformat:
(3) Revocation of the QEF's election as a QEF or cessation of the QEF's status as a PFIC. A revocation
of the QEF election or cessation of PFIC status will result in the complete termination of the extension.
(4) A loan of property by the QEF directly or indirectly to the electing shareholder or related person, or
a pledge or guarantee by the QEF with respect to a loan made by another party to the electing
shareholder or related person. The election will be terminated with respect to undistributed earnings in
an amount equal to the amount of the loan, pledge, or guarantee.
(5) A determination by the District Director pursuant to section 1294(c)(3) that collection of the tax is
in jeopardy. The amount of undistributed earnings with respect to which the extension is terminated
under this paragraph (d)(5) will be left to the discretion of the District Director.
(f) Undistributed PFIC earnings tax liability. The electing shareholder's tax liability attributable to the
ordinary earnings and net capital gain included in gross income under section 1293 shall be the excess
of the tax imposed under chapter 1 of the Code for the taxable year over the tax that would be
imposed for the taxable year without regard to the inclusion in income under section 1293 of the
undistributed earnings as defined in paragraph (b)(3) of this section.
Example. The facts are the same as in § 1.1294-1T (b)(3), Example (1), with the following exceptions.
S, a domestic corporation, did not dispose of any FC stock in 1987. Therefore, because S held 50
percent of the FC stock throughout 1987, S's pro rata share of FC's ordinary earnings was $50,000x. In
addition to $50,000x of ordinary earnings from FC, S had $12,500x of domestic source income and
$6,000x of expenses (other than interest expense) not definitely related to any gross income. These
expenses are apportioned, pursuant to § 1.861-8(c)(2), on a pro rata basis between the domestic and
foreign source income -- $1,200x of expenses, or one-fifth, to domestic source income, and $4,800x of
expenses, or four-fifths, to the section 1293 inclusion. FC paid foreign taxes of $25,000x in 1987.
Accordingly, S is entitled to claim as an indirect foreign tax credit pursuant to section 1293(f) a
proportionate amount of the foreign taxes paid by FC, which is $12,500x ($25,000x x $50,000x/
$100,000x). S is taxed in the U.S. at the rate of 34 percent. The amount of tax liability for which S
may extend the time for payment is determined as follows:
1987 Tax Liability (With Section 1293 Inclusion)
Source

U.S.

Foreign

Income

12,500x

0

0

50,000x

Expenses

-1,200x

-4,800x

Taxable income

11,300x

Section 1293

45,200x

Total taxable income

56,500x

U.S. income tax rate

x34%

Pre-credit U.S. tax

19,210x

Foreign tax credit

-12,500x

1987 Tax Liability

6,710x Dx
1987 Tax Liability (Without Section 1293 Inclusion)

Source

U.S.

Foreign

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178
Income

Page 13 of 21
12,500x

Expenses

-6,000x

Taxable income

6,500x

U.S. tax rate
U.S. Tax
Foreign tax credit
Hypothetical 1987 Tax Liability

0

x34%
2,210x
0
2,210x

The amount of tax, payment of which S may defer pursuant to section 1294, is $4,500x ($6,710x less
$2,210x).
(g) Authority to require a bond. Pursuant to the authority granted in section 6165 and in the manner
provided therein, and subject to notification, the District Director may require the electing shareholder
to furnish a bond to secure payment of the tax, the time for payment of which is extended under this
section. If the electing shareholder does not furnish the bond within 60 days after receiving a request
from the District Director, the election will be revoked.
(h) Annual reporting requirement. The electing shareholder must attach Form 8621 or a statement to
its income tax return for each year during which an election under this section is outstanding. The
statement must contain the following information: (1) The total amount of undistributed earnings as of
the end of the taxable year to which the outstanding elections apply; (2) the total amount of the
undistributed PFIC earnings tax liability and accrued interest charge as of the end of the year; (3) the
total amount of distributions received during the taxable year; and (4) a description of the occurrence
of any other termination event described in paragraph (e) of this section that occurred during the
taxable year. The electing shareholder also shall file by the due date, as extended, for its return a copy
of Form 8621 or the statement with the Philadelphia Service Center, P.O. Box 21086, Philadelphia,
Pennsylvania 19114.
§ 1.1295-1T Election by a passive foreign investment company to be a qualified electing fund
(Temporary).
(a) In general. This section provides rules under which a foreign corporation that qualifies as a passive
foreign investment company (PFIC), as defined in section 1296, may make the election under section
1295 to be a qualified electing fund (QEF). U.S. persons that are shareholders of a QEF are taxable
annually, pursuant to section 1293, on their pro rata shares of the earnings and profits of the QEF
unless the shareholder makes the election under section 1294 to extend the time or payment of tax on
undistributed earnings. The election under section 1295 may not be made by a PFIC that issues any of
its shares in bearer form or is otherwise unable to identify all of its shareholders of record. The election
will be effective with respect to all direct and indirect shareholders of the PFIC. The election may be
made for any taxable year of the corporation during which it is a PFIC.
(b) Election requirements. An election under section 1295 shall be valid only if the PFIC complies with
the following requirements.
(1) Time for making the election -- (i) In general. A PFIC must make the election under this section
before the fifteenth day of the third month following the taxable year for which it is being made.
Pursuant to section 7502 and the regulations thereunder, an election or an amended election under
this section that is postmarked by United States mail on or before the due date will be considered
timely filed. An election mailed by air, postage prepaid and properly addressed to the Internal Revenue
Service Center in Philadelphia, Pennsylvania, and bearing an originating official postmark of a foreign
postal authority dated at least 10 calendar days before the due date, will be deemed timely filed.
(ii) Exception for elections for post-1986 years ended before 12/31/87. A PFIC whose first post-1986
taxable year ended before December 31, 1987 may file its election under this section any time before
March 15, 1988.
(iii) Curing an election made before 5/15/88. A PFIC that must file its election under this section before

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 14 of 21

May 15, 1988 has until June 15, 1988 to satisfy all other requirements of this paragraph (b), provided
that the PFIC has filed a statement containing the information specified in paragraphs (b)(2)(ii) (A),
(B), and (C) of this section at the address specified in paragraph (b)(2)(i) before the fifteenth day of
the third month following the taxable year for which the election is made (or, in the case of any PFIC
described in paragraph (b)(1)(ii), before March 15, 1988).
(2) Manner of making the election -- (i) In general. A PFIC shall make an election under this section by
filing Form 8644 (if available) or a statement, in English, containing the information and
representations required by this paragraph (b)(2). The form or statement shall be filed with the
Internal Revenue Service Center, P.O. Box 21086, Philadelphia, Pennsylvania 19114 U.S.A. The form
or statement shall be signed by a responsible officer of the PFIC who verifies, under penalties of
perjury, that the officer is authorized to make the election on behalf of the PFIC and that all the
information and representations provided in the form or statement are true, correct, and complete to
the best of the officer's knowledge and belief.
(ii) Information to be included in the election statement. If a statement is used, the statement should
be identified, in a heading, as an election under section 1295. The statement must contain the
following information and representations:
(A) The name, address, taxpayer identification number, if any, and country and year of incorporation
of the PFIC.
(B) A statement that the PFIC is making the election under section 1295 and the date on which the
PFIC is making the election.
(C) The taxable year to which the election under section 1295 applies.
(D) The name and address of the United States resident who has been designated by the PFIC as its
U.S. agent pursuant to paragraph (b)(3) of this section.
(E) The PFIC's representation that it will maintain its books of account, records, shareholder ledgers,
and other documents in the United States in accordance with paragraph (b)(4) of this section and will
make such documents available for inspection in the United States by personnel of the Internal
Revenue Service.
(F) The name and address of the person (or persons) having custody of the PFIC's books of account,
records, shareholder ledgers, and other documents in the United States.
(G) A description of each class of stock of the PFIC outstanding during the taxable year, and the
manner in which the stock was traded; if the stock is traded in an established securities market(s), the
name of the market(s).
(H) The total amount of ordinary earnings and net capital gain of the PFIC for the taxable year, as
determined under United States federal income tax principles and in accordance with section 1293(e).
The computations for this purpose shall be determined in the company's functional currency, as
defined in section 985(b), and then translated into U.S. dollars, if necessary, at the weighted average
exchange rate for the PFIC's taxable year, as provided in section 989(b), specifying the rate of
exchange utilized.
(I) The amount of distributions of U.S. dollars and the fair market value and description of any other
property (including foreign currency) distributed during the taxable year of the PFIC to which the
election under this section applies.
(J) If the PFIC is required to make the fair market value determination under paragraph (b)(9) of this
section, the fair market value of one share of each class of stock in the PFIC as of the first day of the
PFIC's first taxable year as a QEF, specifying the manner in which the fair market value of the stock
was determined, and the relevant data, including the sources thereof, used in the determination. The
PFIC shall notify its shareholders of the value of its stock as provided in paragraph (b)(5) of this
section.

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 15 of 21

(3) Appointment of U.S. agent. The PFIC shall appoint a person resident in the United States as its
authorized representative in the United States (U.S. agent). The PFIC shall have a U.S. agent at all
times after the election under section 1295 is made (or perfected pursuant to paragraph (b)(1)(iii) of
this section) and during which it remains in effect. The U.S. agent shall be the PFIC's representative for
all purposes relating to the administration and enforcement of the federal income tax laws, including
providing the Commissioner or his delegate with such information and documents or access thereto as
the Commissioner may require for the administration of sections 1291 through 1297 and the
regulations thereunder.
(4) Books and records. The PFIC shall maintain for each taxable year to which the election under
section 1295 applies permanent books of account, records and such other documents as are necessary
to establish its ordinary earnings and net capital gain as provided in section 1293(e) and computed in
accordance with U.S. generally accepted accounting principles and federal income tax principles. The
PFIC also shall maintain for each taxable year to which the election under section 1295 applies a ledger
of all shareholders of record during the taxable year. The PFIC shall keep copies of such books,
records, shareholder ledgers and other documents in the United States and shall maintain them so
long as the contents thereof may be material to the administration of sections 1291 through 1297, but
for not less than 10 years. Such books, records, shareholder ledgers and other documents shall be
available for inspection in the United States by authorized Internal Revenue officers or employees.
(5) Annual shareholder notification and request for certification of U.S. ownership -- (i) In general.
Before the fifteenth day of the third month following each taxable year for which the election is in
effect, the PFIC shall send the notification of PFIC information and request for shareholder certification
statements, set forth in paragraph (b)(5)(ii) of this section, to all persons that were the shareholders
of record of the PFIC at any time during such year.
(ii) The notification of PFIC information and request for shareholder certification. The notification of
PFIC information and request for shareholder certification statements are described below. The PFIC
may modify these statements as it deems necessary provided the information contained in the
following statements is transmitted to the PFIC shareholders. The PFIC information to be reported in
the notification to shareholders includes information regarding the ordinary earnings and net capital
gain of the PFIC. The PFIC may report the daily amount of its ordinary earnings and net capital gain on
a per share basis. However, if the number of outstanding shares of the PFIC's stock changed at any
time during the taxable year, the PFIC shall provide the shareholders a schedule of the per share
amounts of ordinary earnings and net capital gain for each day during the taxable year. Each
shareholder will determine its pro rata shares of the ordinary earnings and net capital gain of the PFIC
based on the information provided by the PFIC. The information contained in paragraph I(F) of the
notification statement, regarding the section 1291(d)(2) election, is not required if the PFIC made the
election to be a QEF for its first taxable year during which it qualifies as a PFIC under section 1296.
Important Tax Information: Response Required
Notification of Qualified Electing Fund Status and Request for Certification
I. Notification of Qualified Electing Fund Status
A. Earnings and profits: [Name of the PFIC] has elected to be a qualified electing fund for U.S. tax
purposes for the taxable year beginning [first day of the PFIC's taxable year] and ending [last day of
the PFIC's taxable year]. As a result of this election, all U.S. persons that are direct or indirect
shareholders of [name of the PFIC] during any part of that taxable year must include in gross income
for U.S. tax purposes their pro rata shares of ordinary earnings and net capital gain earned by [name
of the PFIC] during the taxable year pursuant to section 293 of the Internal Revenue Code. [The daily
amounts of ordinary earnings and net capital gain per share of stock in [name of the PFIC] for the
taxable year ended [last day of the PFIC'S taxable year] are as follows; you are to compute your pro
rata shares of ordinary earnings and net capital gain by multiplying the daily, per share amount of
each type of income by the number of shares held by you during the year and the number of days
held.] [Attached is a schedule of the per share amounts of ordinary earnings and net capital gain for
each day during the taxable year of [name of the PFIC]; you are to compute your pro rata shares of
ordinary earnings and net capital gain by multiplying each day's per share earnings amounts by the
number of shares held on that day and then adding the daily ordinary earnings and net capital gain

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 16 of 21

amounts.]
Ordinary Earnings: [Daily dollar amount per share of stock] [See attached schedule of the per share
dollar amounts, for each day,] of ordinary earnings as determined under section 1293.
Net Capital Gain: [Daily dollar amount per share of stock] [See attached schedule of the per share
dollar amounts, for each day,] of net capital gain as determined under section 1293.
B. [Name of the PFIC] distributed $ in cash and other property to you during its taxable year.
C. [Name of the PFIC] [was] [was not] a controlled foreign corporation within the meaning of section
957 of the Internal Revenue Code during the taxable year. Its subpart F income, as determined under
section 951 for the taxable year; is XXXXX .
D. [Name of the PFIC] [was] [was not] a foreign personal holding company within the meaning of
section 552 of the Internal Revenue Code during the taxable year. Its undistributed foreign personal
holding company income, as determined under section 556, is XXXXX .
E. If any portion of your share of the current year earnings of [name of the PFIC] was not distributed
to you during its taxable year and you owned the stock in [name of the PFIC] on [the last day of the
PFIC's taxable year], you may be able to extend the time for payment of tax on some or all of this
income under section 1294 of the Internal Revenue Code. See IRS Form 8621.
[Paragraph F is not required if the PFIC made the election to be a QEF for its first post-1986 taxable
year that it qualifies as a PFIC under section 1296.]
F. If you were a U.S. person that was a direct or indirect shareholder of [name of the PFIC] on [the
first day of its first taxable year as QEF], you may make the election under section 1291(d)(2) to
recognize gain on a deemed sale of your stock in [name of the PFIC]. The fair market value of your
stock interest, divided among the different classes of stock that you owned on that day, is as follows:
[Class of Stock]: $[fair market value determined in accordance with § 1.1295-1T(b)(9)].
G. The U.S. taxpayer identification number assigned to [name of the PFIC] is XXXXX .
II. Request for Certification
U.S. persons that own stock directly or indirectly in [name of the PFIC] are requested to report to
[name of the PFIC] by completing the following certification statement and returning it to the
company. If additional space is needed, provide the required information on a separate sheet of paper
and attach it to this form.
U.S. persons. If you are a U.S. citizen or individual resident, a U.S. corporation, or an estate, trust
(other than a grantor trust, described below) or partnership that is a U.S. person for U.S. tax
purposes, please complete the Certification Statement below and return it to [name of the PFIC] by
[date].
Foreign persons. If you are a foreign corporation that is a passive foreign investment company, a
foreign corporation that has a 50 percent or greater shareholder, or an estate, trust (other than a
grantor trust, described below), or partnership that is not a U.S. person for U.S. tax purposes, please
send this Notification of Qualified Electing Fund Status and Request for Certification to each of your
shareholders (foreign corporations that are not passive foreign investment companies need only send
the statement to their 50 percent or greater shareholder(s)), beneficiaries, or partners, indicating on
the Notification of Qualified Electing Fund Status the amounts attributable to such person's indirect
interest in [name of the PFIC]. (If you are unable to compute the amounts attributable to such
person's indirect interest, please indicate the amounts attributable to your own interest in [name of the
PFIC].)
Grantor trusts. If you are a trust the income of which is taxed entirely to the grantor or other person
considered the owner of the trust under U.S. tax principles, please send the Notification of Qualified

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 17 of 21

Electing Fund Status and Request for Certification to the grantor/owner of the trust.
Nominees. If you are a U.S. or foreign person holding stock in [name of the PFIC] for the account of
another person, please send this Notification of Qualified Electing Fund Status and Request for
Certification to that other person, indicating on the Notification of Qualified Electing Fund Status the
amounts attributable to such person's indirect interest in [name of the PFIC].
Each indirect shareholder that certifies to the PFIC that (he)(she)(it) is a U.S. person shall state (his)
(her)(its) pro rata share of the ordinary earnings and net capital gain of the PFIC and pro rata share of
the cash and the fair market value of other property distributed by the PFIC.
Certification Statement
[Name of direct or indirect PFIC shareholder (as reported on the U.S. tax return)] is a U.S. citizen/U.S.
individual resident/U.S. corporation/U.S. estate/U.S. trust/U.S. partnership/foreign trust/foreign estate
(please circle applicable category) that held stock directly or indirectly in [name of the PFIC] during
[name of the PFIC]'s taxable year ending XXXXX . [Name of direct or indirect shareholder]'s address is
XXXXX , and United States taxpayer identification number is XXXXX . [Name of direct or indirect PFIC
shareholder]'s pro rata share of ordinary earnings is $ XXXXX , pro rata share of net capital gain is $
XXXXX , and pro rata share of the cash and the fair market value of other property distributed by
[name of the PFIC] is XXXXX . Stock in [name of PFIC] is not registered in the name of [name of
indirect PFIC shareholder] because the stock was held through [name(s) of nominee(s) or foreign
person(s) through which stock was held indirectly].
Under penalties of perjury, I declare that I have examined this certification and, to the best of my
knowledge and belief, it is true, correct, and complete.
[Signature of shareholder/authorized representative of shareholder and title, and date].
(6) Annual reporting by the PFIC to the Internal Revenue Service. By the fifteenth day of the ninth
month following each taxable year of the PFIC to which the election under this section applies, the PFIC
shall send to the Internal Revenue Service Center, P.O. Box 21086, Philadelphia, Pennsylvania 19114:
(i) A schedule containing the following information obtained pursuant to the certification procedure
described in § 1.1295-1T(b)(5) from each direct or indirect shareholder that certified its status as a
U.S. person: Names, addresses, taxpayer identification numbers, their pro rata shares (determined in
the manner described in section 1293(b)) of the ordinary earnings and net capital gain of the PFIC for
the taxable year determined in accordance with section 1293(e), and their pro rata shares of cash and
fair market value of other property distributed to them or to the persons that held the stock directly or
indirectly for their benefit.
(ii) For all taxable years of the PFIC following the year of the election, a Form 8644 (if available) or a
statement containing the information described in paragraphs (b)(2)(ii) and (b)(6)(i) relating to
information to be included in the election statement.
(7) Amendment of earnings information. The QEF shall report to the Internal Revenue Service, at the
address specified in paragraph (b)(6) of this section, any amendments to the earnings information
required to be provided to the Internal Revenue Service pursuant to paragraphs (b)(2)(ii)(H) and (b)
(6) of this section, and notify all its shareholders of any amendments to the earnings information
reported to the shareholders pursuant to paragraph (b)(5). The QEF shall recalculate its ordinary
earnings and net capital gain at any time that it discovers an error in its previous calculations or its
books and records or otherwise makes a necessary adjustment in its books and records. The amended
information shall be clearly identified as amending the original report or shareholder notification.
(8) Taxpayer identification number. The Internal Revenue Service will assign the PFIC a taxpayer
identification number upon the filing of the PFIC's election to be a QEF. The PFIC shall use the assigned
number on all forms, statements, notifications and other communications filed with the Internal
Revenue Service or provided to its shareholders for purposes of the election under this section.
(9) Fair market value determination by certain companies. If a foreign corporation is making the

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 18 of 21

election to be a QEF for a taxable year other than the first taxable year during which it qualified as a
PFIC under section 1296, it must determine the fair market value of its stock on the first day of its first
taxable year to which the election under section 1295 applies (the valuation date). A PFIC required to
make the fair market value determination shall notify its shareholders of the stock value pursuant to
paragraph (b)(5) of this section. This value is to be used by the shareholder in making the election
under section 1291(d)(2) to recognize gain on a deemed sale of the PFIC stock held on the valuation
date. For purposes of determining the fair market value of the stock in the PFIC, the following rules
shall apply.
(i) Companies other than open-end investment companies. The fair market value of companies, other
than open-end investment companies as defined in paragraph (b)(9)(ii)(B) of this section, shall be
determined pursuant to subdivisions (A) through (E) of this paragraph (b)(9)(i).
(A) If the stock of the PFIC was regularly traded on an established securities market on the valuation
date, the fair market value of the stock shall be the closing price of the stock on the valuation date. If
there were no sales on the valuation date, but there were sales on dates within 30 business days
before or after the valuation date, the fair market value shall be the mean of the opening and closing
prices on the nearest date before or after the valuation date.
(B) If the stock of the PFIC was regularly traded in more than one established securities market, the
price of the stock on a composite listing of all established securities markets in which it is regularly
traded must be used, provided such a composite listing is set forth in a generally available listing or
publication of general circulation. If such a composite listing is not available, the records of the price in
the established securities market in which the stock is principally traded must be used.
(C) In any case in which a dividend is declared on a share of stock before the valuation date but
payable to stockholders of record on a date after the valuation date, the amount of the dividend must
be added to the ex-dividend quotation in determining the fair market value of the stock as of the
valuation date.
(D) If the stock in the PFIC was not traded on an established securities market on the valuation date,
or within 30 business days before or after the valuation date, the fair market value of the stock shall
be the value determined by applying the guidelines of Rev. Rul. 59-60; 1959-1 C.B. 237, as amplified
by Rev. Rul. 77-287, 1977-2 C.B. 319, Rev. Rul. 80-213, 1980-2 C.B. 101, and Rev. Rul. 83-120,
1983-2 C.B. 170.
(E) For purposes of this paragraph, the terms "established securities market" and "regularly traded"
shall have the meanings given such terms in § 1.897-1 (m) and (n), respectively. However, stock will
not be treated as regularly traded if there was not a sale of the stock within 30 business days before or
after the valuation date on an established securities market.
(ii) Open-end investment companies -- (A) The fair market value of a share in a PFIC that is an openend investment company (commonly known as a "mutual fund") shall be its public redemption price
(or bid price) on the valuation date. If there is no public redemption price quoted by the PFIC for the
valuation date, the fair market value of the mutual fund share is the last public redemption price
quoted by the PFIC for the most recent day preceding the valuation date for which there was a
quotation. In any case where a dividend is declared on a share in a PFIC that is an open-end
investment company before the valuation date, but payable to shareholders of record after the
valuation date and the share is quoted "ex-dividend" on the valuation date, the amount of the dividend
must be added to the ex-dividend quotation in determining the fair market value of the share as of the
valuation date.
(B) The term "open-end investment company" and the term "mutual fund" include only a company that
on the applicable valuation date was engaged in offering its shares to the public in the capacity of an
open-end investment company. An open-end investment company is an investment company that
stands ready to redeem its shares, on demand, at their current net asset value.
(C) The term "public redemption price" and the term "bid" price mean the price (the current net asset
value) at which the open-end investment company will redeem its shares.

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 19 of 21

(c) Revocability of the election -- (1) In general. The election under section 1295 may be revoked by
the PFIC only with the consent of the Commissioner. In addition, the Commissioner may revoke the
election for failure of the PFIC to satisfy any requirements set forth in this section within 90 days of the
mailing of notification from the Internal Revenue Service of such failure. The revocation will be
effective for the taxable year for which the requirement was not satisfied. The PFIC shall notify the
U.S. persons that are its shareholders within 90 days of receipt of a notice from the Internal Revenue
Service that the election under section 1295 has been revoked.
(2) Failure to obtain shareholder certification. The election under section 1295 will not be invalidated or
revoked in the event a shareholder of the PFIC fails to provide the certification requested pursuant to
paragraph (b)(5) of this section.
§ 1.1297-3T Deemed sale election by a United States person that is a shareholder of a passive foreign
investment company (Temporary).
(a) In general. Except as indicated below, a shareholder of a foreign corporation that no longer
qualifies as a passive foreign investment company (PFIC) shall be treated for tax purposes as holding
stock in a PFIC and therefore continue to be subject to taxation under section 1291 unless the
shareholder makes the election under section 1297(b)(1). This continuing PFIC taint shall not apply to
stock in a PFIC for which an election under section 1295 to be a qualified electing fund (QEF) has been
in effect throughout that portion of the shareholder's holding period during which the PFIC qualified as
a PFIC. A U.S. person making the election under section 1297(b)(1) shall be treated as having sold its
stock in the PFIC on the last day of the last taxable year of the foreign corporation during which it
qualified as a PFIC (termination date). The shareholder thereafter shall not be treated as holding stock
in a PFIC and shall not be subject to taxation under section 1291. The deemed sale is taxed as a
disposition under section 1291. Pursuant to that section, the gain, if any, is considered earned pro rata
over the shareholder's holding period in the-stock and is taxed as ordinary income. The tax on the gain
is based on the value of the tax deferral and includes an interest charge. Any loss realized in the
deemed sale may not be recognized. This section provides rules for making the election under section
1297(b)(1). The election is available to a U.S. person that is a shareholder of a foreign corporation if -(1) The foreign corporation was a PFIC at any time during the period the U.S. person held the stock;
(2) At any one time during the U.S. person's holding period, the foreign corporation qualified as a PFIC
but was not a QEF; and
(3) The foreign corporation is no longer a PFIC within the meaning of section 1296.
(b) Time and manner of making the election -- (1) In general. The shareholder shall make the election
under this section and section 1297(b)(1) by filing an amended income tax return for its taxable year
that includes the termination date within three years of the due date, as extended, for the
shareholder's tax return for such taxable year. The shareholder must attach to the amended tax return
either Form 8621 or a statement, prepared in accordance with paragraph (c)(2) of this section,
reporting the gain on the deemed sale of the stock as required by section 1291(a)(2) (as if such
deemed sale occurred under section 1291(a)(2)), and by paying the tax on the gain as required by
section 1291 (including the payment of the deferred tax amount required under sections 1291(a)(1)(C)
and 1291(c)). The electing shareholder also shall pay interest, pursuant to section 6601, on the
underpayment of tax for the taxable year of termination. An electing shareholder that realizes a loss
shall report the loss on Form 8621, but shall not recognize the loss.
(2) Information to be included in the election. If a statement is used, the statement should be
identified, in a heading, as an election under section 1297(b)(1). The statement must include the
following information and representations:
(i) The name, address and taxpayer identification number of the electing shareholder;
(ii) The name, address and taxpayer identifiction number, if any, of the PFIC;
(iii) A statement that the shareholder is making the election under section 1297(b)(1);

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 20 of 21

(iv) The period in the electing shareholder's holding period in the stock during which the foreign
corporation was a PFIC, the period during which it was a QEF (and whether the shareholder elected
under section 1294 to defer payment of its tax liability attributable to any portion of such period), and
the termination date;
(v) The manner in which the PFIC lost the characteristics of a PFIC;
(vi) A schedule listing the shares in the PFIC held by the electing shareholder on the termination date,
listing the date(s) each share or block of shares was acquired, the number of shares acquired on each
date listed, and the tax basis of each share;
(vii) The fair market value of the stock in the PFIC on the termination date; for this purpose, the fair
market value of the stock shall be determined according to the rules of § 1.1295-1T(b)(9); and
(viii) A schedule showing the computation of the gain recognized on the deemed sale, and a calculation
of the deferred tax amount, as defined in section 1291(c).
(3) Adjustment to basis; treatment of holding period. An electing shareholder that recognizes gain on
the deemed sale of stock shall increase its adjusted basis in the stock by the amount of gain
recognized. An electing shareholder shall not adjust the basis in stock with respect to which the
shareholder realized a loss on the deemed sale. An electing shareholder shall thereafter treat its
holding period in the stock, for purposes of sections 1291 through 1297, as beginning on the day
following the termination date without regard to whether it recognized gain on the deemed sale; for
section 1223 purposes, the holding period in the stock in the PFIC shall include the period prior to the
deemed sale.
OMB Control Number Under the Paperwork Reduction Act
(26 CFR Part 602)
Par. 3. The authority for Part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
§ 602.101 [Amended]
Par. 4. Section 602.101(c) is amended by inserting in the appropriate places in the table § 1.1291-0T .
. . 1545-1028, § 1.1291-10T . . . 1545-1028, § 1.1294-1T . . . 1545-1028, § 1.1295-1T . . . 15451028, § 1.1297-3T . . . 1545-1028.
Lawrence B. Gibbs,
Commissioner of Internal Revenue.
Approved: February 23, 1988.
O. Donaldson Chapoton,
Assistant Secretary of the Treasury.
[FR Doc. 88-4446 Filed 2-26-88; 3:54 pm]
BILLING CODE 4830-01-M
Source: Proposed Regulations & Treasury Decisions
View: Full
Date/Time: Tuesday, November 8, 2011 - 9:14 AM EST

ln

About LexisNexis | Privacy Policy | Terms & Conditions | Contact Us
Copyright © 2011 LexisNexis, a division of Reed Elsevier Inc. All rights reserved.

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011

Search - 6 Results - TD 8178

Page 21 of 21

http://www.lexis.com/research/retrieve?_m=75e94bf69d0e6214b84cb5e3330e3b61&_browseTyp... 11/8/2011