Proposed Regulation § 1.1291-6. Nonrecognition transfers of stock of section 1291 funds.
(a) In general.—
(1) Scope.—This section provides rules concerning the recognition of gain by a shareholder on a direct or indirect disposition of stock of a section 1291 fund that results from a transaction in which, but for section 1291 and these regulations, there would not be full recognition of gain under the Code and regulations (the transaction hereinafter referred to as a nonrecognition transfer). This section also provides coordination between section 1291 and other
provisions of the Code and regulations under which gain must be recognized in transactions that would otherwise be entitled to nonrecognition.
(2) Nonrecognition transfers.—A nonrecognition transfer includes, but is not limited to, a gift, a transfer by reason of death, a distribution to a beneficiary by a trust or estate (other than a distribution to which section 643(e)(3) applies), and a transfer in which gain or loss is not fully recognized pursuant to any of the following provisions: Sections 311(a), 332, 336(e), 337, 351, 354, 355, 361, 721, 731, 852(b)(6), 1036, and 1041.
(3) Application of section to transfer of stock of a pedigreed QEF.—This section does not apply to a nonrecognition transfer of stock of a pedigreed QEF. The following example illustrates the rule of this paragraph (a)(3).
Example.
X is a U.S. person that is a shareholder of FC, a corporation. FC owns all the stock of FS. Both FC and FS are pedigreed QEFs with respect to X. Pursuant to a plan of complete liquidation, satisfying the requirements of section 332, FS distributes all its assets and liabilities to FC. No gain or loss will be recognized to FC, FS, or X under section 1291(f) or 1297(b)(5).
(b) Recognition of gain or loss.—
(1) In general.—Unless otherwise provided in paragraph (c) of this section, a shareholder recognizes gain on any direct or indirect disposition of stock of a section 1291 fund in accordance with the rules of § 1.1291-3, without regard to whether the disposition is a result of a nonrecognition transfer as defined in paragraph (a)(2) of this section.
(2) Coordination with other recognition provisions.—A direct or indirect disposition of stock to which an exception to the gain recognition rule of paragraph (b)(1) of this section applies will nevertheless be a disposition taxable under § 1.1291-3 if the gain must be recognized pursuant
to another provision of the Code or regulations. For coordination with section 367, see paragraph
(d)(1) of this section.
(3) No recognition of loss.—This section does not permit or require the recognition of loss on a direct or indirect disposition of stock of a section 1291 fund if such loss would not otherwise be recognized under another section of the Code or regulations. For the effect on the holding period of a disposition resulting from a nonrecognition transfer that would be subject to the gain recognition rule but for the fact that a loss is realized, see paragraph (b)(5) of this section.
(4) Special basis rules.—
(i) Direct shareholders.—If the gain recognition rule of paragraph (b)(1) of this section applies to a nonrecognition transfer in which a direct shareholder transfers stock of a section 1291 fund, proper adjustment is made to the basis of such stock in the hands of the transferee, as well as to the basis of the property, if any, received by the shareholder in the transaction.
(ii) Indirect shareholders.—If the gain recognition rule of paragraph (b)(1) of this section applies to a disposition by an indirect shareholder that results from a nonrecognition transfer, the shareholder’s adjusted basis of the stock or other property owned directly by the shareholder through which ownership of the section 1291 fund is attributed to the shareholder is increased by the amount of gain recognized by the shareholder. In addition, solely for purposes of
determining the subsequent treatment under the Code and regulations of a direct or indirect shareholder of the stock of the section 1291 fund treated as disposed of, the adjusted basis of the
actual owner of the stock of the section 1291 fund is increased by the amount of gain recognized by the shareholder.
(iii) Stock acquired by reason of death.—Unless all of the gain is recognized to a shareholder (the decedent) pursuant to paragraph (c)(2)(iii)(B) of this section, the basis of stock received on the death of the decedent by the decedent’s estate (other than a foreign estate within the meaning of section 7701(a)(31)), or directly by another U.S. person, is the lower of the fair market value or adjusted basis of the transferred stock in the hands of the shareholder immediately before death. If gain is recognized by the decedent, the decedent’s adjusted basis of the stock of the section 1291 fund is increased by the gain recognized with respect thereto.
(iv) Assets distributed in certain subsidiary liquidations.—The bases of the assets of a section 1291 fund distributed to an 80 percent corporate distributee (within the meaning of section 337(c)), in complete liquidation of the section 1291 fund pursuant to section 332, is increased by
the amount by which the gain recognized by the shareholder exceeds the amount that would have been taxed as a dividend under section 367(b). Except as otherwise provided in this paragraph
(b)(4)(iv), the adjusted basis of each distributed asset is increased (but not in excess of its fair market value) by a pro rata portion of the excess described in the preceding sentence, based on the realized but unrecognized gain with respect to such asset relative to the realized but unrecognized gain with respect to all distributed assets. For purposes of the preceding sentence, money is not treated as an asset. The adjusted basis of a receivable may not be increased pursuant to this paragraph (b)(4)(iv) to an amount that exceeds the receivable’s face amount.
(5) Special holding period rule for transfers subject to gain recognition rule.—If a loss is realized on a direct or indirect disposition of stock of a section 1291 fund in a transaction in which any gain, if realized, would have been recognized under this section, the shareholder’s holding period for stock received in the transaction, if any, as well as the transferee’s holding period of the transferred stock, begins on the day after the disposition, but only for purposes of applying sections 1291 through 1297 to the shareholder or the transferee with respect to such stock, as appropriate.
(c) Exceptions to general rule.—
(1) Transfer of section 1291 fund stock for PFIC stock.—Gain is not recognized on a direct or indirect disposition of stock of a section 1291 fund that results from a nonrecognition transfer if in the transfer, stock of the section 1291 fund, or an interest in another person that causes the shareholder to be an indirect shareholder, is exchanged solely for either—
(i) Stock of the same or another corporation that either qualifies under section 1296(a) as a PFIC for its taxable year that includes the day after the nonrecognition transfer or is the acquiring foreign corporation in a section 368(a)(1)(F) reorganization; or
(ii) An interest in another person that owns directly or indirectly stock of the transferred section 1291 fund or of another PFIC, but only to the extent (by value) that the shareholder is treated under § 1.1291-1(b)(8) as owning after the transfer at least as great an interest in the section 1291 fund or other PFIC that the indirect shareholder owned before the transfer. Stock in another PFIC owned before the transfer is not taken into account for purposes of the preceding sentence. For the definition of an indirect disposition, see generally § 1.1291-3(e)(2).
(2) Transfer to U.S. person.—
(i) In general.—Unless otherwise provided, a shareholder does not recognize gain on a direct or indirect disposition of stock of a section 1291 fund that results from a nonrecognition transfer if immediately after the transfer such stock is owned or considered owned by a U.S. person (U.S. transferee), provided that—
(A) The basis of the stock that is the subject of the disposition, in the hands of its actual owner immediately after the transfer, is no greater than the basis of such stock in the hands of its actual owner immediately before the transfer;
(B) The U.S. transferee’s holding period for the transferred stock is at least as long as the holding period of the shareholder immediately before the transfer; and
(C) The aggregate ownership (determined under § 1.1291-1(b)(8)) of the shareholder and the U.S. transferee immediately after the transfer (determined without regard to stock held by the U.S. transferee prior to the transfer) is the same as or greater than the shareholder’s proportionate ownership immediately before the transfer. This paragraph (c)(2)(i) does not apply to a transfer to a partnership, S corporation, trust or estate. For those rules, see paragraph (c)(3) of this section.
(ii) Transitory ownership.—Gain is not recognized to a domestic corporation that is a party to a reorganization within the meaning of section 368(b) if, pursuant to a plan of reorganization, the corporation acquires stock of a PFIC that is a party to the reorganization in exchakl;,r8nge for the domestic corporation’s assets, and transfers the PFIC stock under section 361(c) to a shareholder that is a U.S. person in exchange for the shareholder’s stock of the domestic corporation.
(iii) Transfer by reason of death.—(A) In general.—Except as provided in paragraph (c)(2)(iii)(B) of this section, gain is not recognized to a shareholder upon a disposition of stock of a section 1291 fund that results from a nonrecognition transfer to the shareholder’s domestic estate or directly to another U.S. person upon the death of the shareholder. (B) Exception.—Gain is recognized to a shareholder on the transfer of stock of a section 1291 fund to the shareholder’s domestic estate if, pursuant to the terms of the will, the section 1291 fund stock may be transferred to either a foreign beneficiary or a trust established in the will.
(iv) Section 355 distribution of stock of section 1291 fund.—Gain is not recognized to a shareholder that is the distributing corporation upon a direct or indirect disposition of stock of a section 1291 fund that results from the distribution of stock of a controlled corporation to another U.S. person (the distributee) in a transaction qualifying under section 355(a) if the distributee is a shareholder with respect to such stock immediately after the distribution. The distributee in such
a transaction takes a holding period in the stock of the controlled corporation equal to the longer of the holding period determined under section 1223(1) or the distributing corporation’s holding period of the stock of the controlled corporation. If the controlled corporation is itself the section 1291 fund, the distributee in such a transaction takes a basis in the stock of the controlled corporation equal to the lesser of the adjusted basis determined under section 358 or the distributing corporation’s adjusted basis of the stock of the controlled corporation immediately prior to the distribution.
(v) Gifts incurring gift tax.—If a shareholder makes a gift of stock of a section 1291 fund to a U.S. person and thereby incurs gift tax, the shareholder will not recognize gain, but will be liable for the deferred tax amount as if the shareholder recognized gain in the amount of the
gift tax that is added to the basis of the transferred stock under section 1015(d). The adjusted basis of the transferred stock may only be increased, to the extent provided in section 1015(d), by the amount of gift tax paid. The following example illustrates the rule of this paragraph (c)(2)(v). Example. M, a U.S. person, purchased 1,000 shares of NQF, a PFIC, on December
31, 1989. M did not elect to treat NQF as a QEF. M gave the NQF stock to her daughter, H, also a U.S. person, on December 31, 1993. M paid $100x of gift tax. As provided in section 1015(a) and
(d)(6), H’s adjusted basis in the NQF stock is M’s adjusted basis, increased by $60x of gift tax paid. As a result, pursuant to § 1.1291-6(c)(2)(v), M is liable for the deferred tax amount that M would have owed if M recognized $60x of gain on a taxable transfer of the NQF stock. For purposes of calculating the deferred tax amount, the $60x is allocated over M’s four-year holding period, with the deferred tax amount calculated with respect to the $45x allocated to 1991, 1992,
and 1993. Other than for the $60x of gift tax paid, there are no further adjustments to H’s basis in the NQF.
(vi) Exception inapplicable.—Paragraph (c)(2) of this section does not apply to a
disposition of stock of a section 1291 fund that results from a nonrecognition transfer of stock of a section 1291 fund if the U.S. transferee is—
(A) An organization that will not be subject to section 1291 and these regulations pursuant to § 1.1291-1(e) with respect to that section 1291 fund; or
(B) A trust, including a testamentary trust or other irrevocable trust, that is not a grantor trust or beneficiary-owned section 678 trust to which paragraph (c)(3)(iv) of this section applies.
(3) Transfers involving pass-through entities.—
(i) Section 721 transfer to partnership.— Gain is not recognized to a shareholder on a disposition of stock of a section 1291 fund that results from a transfer to a partnership under section 721, but only to the extent that the shareholder is
treated as owning such stock immediately after the transfer pursuant to § 1.1291-1(b)(8)(iii)(A).
(ii) Section 731 distribution by partnership.—Gain is not recognized to a partner on a disposition of stock of a section 1291 fund that results from a distribution under section 731, but only to the extent that the partner is treated as owning such stock immediately after the
distribution pursuant to § 1.1291-1(b)(8).
(iii) Transfer to S corporation.—Gain is not recognized to a shareholder on a disposition of stock of a section 1291 fund that results from a transfer to an S corporation under section 351, but only to the extent that the shareholder is treated as owning such stock
immediately after the transfer pursuant to § 1.1291-1(b)(8)(iii)(B).
(iv) Transfer to grantor trust.—Gain is not recognized on a disposition of stock of a section 1291 fund that results from a nonrecognition transfer to a trust by the grantor of the trust if the grantor is treated as owning the portion of the trust that includes both the income and corpus
portions of the stock that is disposed of. If a person other than the grantor is treated as the owner of the portion of a beneficiary-owned section 678 trust that includes the income and corpus portions of the stock transferred to the trust, that person is treated as acquiring the stock by gift from the grantor, which is a transfer subject to the general rules of this section. Stock owned directly or indirectly by a grantor of a grantor trust or by a beneficiary of a beneficiary-owned section 678 trust will be treated as transferred by the grantor or other person considered the owner thereof for purposes of this section at the time the grantor or beneficiary is no longer considered the owner of both the income and corpus portions of the stock of the section 1291 fund. For special rules applicable to a grantor or beneficiary-owned section 678 trust, see sections 671 through 679 and the regulations under those sections.
(4) Transfer to nonresident alien spouse who files joint return.—Gain is not recognized on a disposition of stock of a section 1291 fund that results from a nonrecognition transfer to the shareholder’s nonresident alien spouse who has made the election under section 6013(g) and is
treated as a resident for purposes of chapter 1 of the Code. A termination of the election pursuant to section 6013(g)(4) will be treated as a disposition of the stock by the transferee spouse as provided in § 1.1291-3(b)(2).
(d) Special rules.—
(1) Section 367 or 1492 transfer.—
(i) Gain recognition transfer.—If the gain recognition rule of paragraph (b)(1) of this section applies to a disposition of stock of a section 1291 fund that results from a transfer with respect to which section 367 or 1492 requires the shareholder to recognize gain or include an amount in income as a distribution under section 301, the gain realized on the transfer is taxable as an excess distribution as provided in § 1.1291-2(e)(2). The excess, if any, of the amount to be included in income pursuant to section 367(b) over the gain realized is taxable as provided in the regulations under section 367(b).
(ii) Disposition to which exception applies.—If an exception to the gain recognition rule of paragraph (b)(1) of this section applies to a disposition to which section 367(b) applies, and section 367(b) requires the shareholder to include an amount in income as a distribution taxable under section 301, that amount is an excess distribution taxable as provided in § 1.1291-2(e)(2).
(2) Taxable year of disposition by reason of death.—A disposition of stock of a section 1291 fund by reason of a shareholder’s death, to which the gain recognition rule of paragraph (b)(1) or (c)(2)(iii)(B) of this section applies, will be treated as a disposition by the shareholder effected
immediately before death and taxable to the shareholder in the shareholder’s last taxable year.
(3) Section 643(e)(3) election.—An election by a foreign estate or trust under section 643(e)(3) will not apply to stock of a section 1291 fund distributed to a U.S. person if the gain recognized by reason of the election is not taxable in the United States.
(e) Receipt of nonqualifying property.—If a nonrecognition transfer results in a disposition of stock of a section 1291 fund to which an exception to the gain recognition rule of paragraph (b)(1) of this section would apply but for the fact that the property received in the transfer includes money or property (nonqualifying property) in addition to property permitted to be received pursuant to paragraph (c) of this section, gain is recognized only to the extent of the nonqualifying property. If such nonqualifying property is treated as a distribution by the section 1291 fund under otherwise applicable provisions of the Code, the distribution will be taxable on an excess distribution as provided in § 1.1291-2(e)(2).
(f) Examples.—The following examples illustrate the operation of this section.
Example 1.
A is a shareholder of PFIC, a corporation organized under the laws of Country X. PFIC is a section 1291 fund with respect to A. To avoid expropriation of the assets of PFIC by the government of Country X, PFIC’s management has decided to relocate to Country Y. To effect the relocation, PFIC adopted a plan of reorganization pursuant to which PFIC will transfer all of its assets to Newco, a newly organized Country Y corporation, in exchange for Newco stock and the assumption of PFIC’s liabilities in a transaction that will qualify as a reorganization described in section 368(a)(1)(F). PFIC will distribute the Newco stock to its shareholders in exchange for its stock. A will transfer all of its PFIC stock in exchange for Newco stock of equal value. A will not recognize gain on the transfer of PFIC stock in exchange for Newco stock pursuant to section 354 and § 1.1291-6(c)(1)(i), and the days in A’s holding period of the Newco stock will retain the prePFIC and prior PFIC character of the days in A’s holding period of the PFIC stock pursuant to § 1.1291-1(h)(7). See § 1.1291-1(b)(1)(ii).
Example 2.
X is a domestic corporation that owns 75 percent of F, a foreign corporation that is not a PFIC. F owns 100 percent of the stock of FS, a PFIC. X is treated under
§ 1.1291-1(b)(8)(ii)(A) as owning 75 percent of the stock of FS. X has not elected under section 1295 to treat FS as a QEF. FC, a foreign corporation, will acquire substantially all the assets of F in exchange for FC stock and the assumption of the liabilities of F in a transaction that will qualify as a reorganization described in section 368(a)(1)(C). FC never qualified as a PFIC and will not qualify as a PFIC at the beginning of the day after the transaction. F will distribute the FC stock to its shareholders in exchange for their F stock. X will transfer all its F stock to F in exchange for FC stock of equal value. After the reorganization, X will hold 49 percent of the outstanding FC stock, and therefore will no longer be treated under § 1.1291-1(b)(8)(ii)(A) as owning stock of FS. Pursuant to § § 1.1291-6(b)(1) and 1.1291-3(e)(1), X will be taxed on the indirect disposition of the
FS stock.
Example 3.
X, a domestic corporation, owns stock of PFIC, a corporation that is a section 1291 fund with respect to X. Pursuant to a plan of reorganization, X will transfer to FC, a foreign corporation, substantially all of its assets in exchange for FC voting stock and FC’s assumption of the liabilities of X in a transaction that will qualify as a reorganization described in section 368(a)(1)(C). It is assumed that the transaction is not taxable under section 367(a) (including section 367(a)(5)). X will distribute the FC stock to its shareholders in exchange for their X stock. FC is not a PFIC and will not qualify as a PFIC for the taxable year that includes the day after the transfer. In addition, after the reorganization, no U.S. person will own 50 percent or more of FC. Pursuant to § 1.1291-6(b)(1), section 361(a) will not apply to X’s transfer of the PFIC stock to FC. X
therefore will recognize the gain realized on the transfer of the stock of PFIC. The gain will be taxed to X as an excess distribution pursuant to § 1.1291-3.
Example 4.
X, a domestic corporation, satisfies the stock ownership requirements specified in section 332(b) with respect to PFIC, a corporation that is a section 1291 fund with respect to X. Pursuant to a plan of complete liquidation, PFIC will distribute all its assets and liabilities to X in exchange for its stock and liquidate. Pursuant to § 1.1291-6(b)(1) and (d)(1)(i), section 332(a) will not apply to the complete liquidation of PFIC. X therefore will recognize gain on the disposition of the stock of PFIC, which gain will be taxed as an excess distribution pursuant to § 1.1291-3. The adjusted basis of the assets of X will be increased as provided in § 1.1291-6(b)(4)(iv).
Example 5.
USP, a domestic corporation, owns all the stock of USS, also a domestic corporation. USS owns stock of FS, a corporation that is a section 1291 fund with respect to USS. Pursuant to a plan of reorganization that will qualify under section 368(a)(1)(C), USS will transfer substantially all its assets to FC, a PFIC, in exchange for FC stock and the assumption by FC of the liabilities of USS. USS will transfer the FC stock to USP in exchange for its stock. Pursuant to § 1.1291-6(c)(1), section 361 applies to USS’s transfer to FC of the FS stock. As provided in § 1.1291-6(c)(2)(ii), USS will not recognize any gain on the transfer of the FC stock to USP in
exchange for its stock.
Example 6.
A, a U.S. person, owns all the stock of FC, a corporation that is both a controlled foreign corporation and a section 1291 fund with respect to A. Pursuant to a reorganization plan, FC will transfer all its assets to F, a foreign corporation that is a PFIC but not a controlled foreign corporation after the transfer, in exchange for F stock and the assumption of FC’s liabilities in a transaction that will qualify as a reorganization described in section 368(a)(1)(C). FC will
distribute the F stock to A in exchange for A’s FC stock. A will not recognize gain on the transfer of FC stock in exchange for F stock pursuant to section 354 and § 1.1291-6(c)(1). However, the regulations under section 367(b) require A to include a certain amount in gross income as a distribution taxable under section 301. As provided in § 1.1291-6(d)(1)(ii), A will treat that amount as an excess distribution taxable as provided in § 1.1291-2(e)(2).
Example 7.
M, a U.S. person, purchased 100 shares of the stock of NQF on December 31, 1989, for $100. NQF is a corporation that is a section 1291 fund with respect to M. On January 1, 1992, when the 100 shares of NQF stock had a fair market value of $200, M transferred its NQF stock to P, a domestic partnership, of which M and N, also a U.S. person, are equal partners. After the transfer to P, M will be considered to own only 50 shares of the NQF stock pursuant to § 1.1291-1(b)(8)(iii)(A), notwithstanding that gain recognized with respect to all 100 shares would be allocated to M pursuant to section 704(c). M therefore is taxable on the disposition of 50 shares of NQF stock in accordance with § 1.1291-6(c)(3)(i).
(g) Reporting requirements for transfers entitled to nonrecognition treatment under this section.—If an exception to the gain recognition rule of paragraph (b)(1) of this section applies wholly or partly to a disposition of stock of a section 1291 fund that results from a nonrecognition transfer, the shareholder must provide the following information in an attachment to Form 8621, which must be filed with the shareholder’s federal income tax return for the taxable year in which the transfer occurs:
(1) A complete description of the transfer, including a complete description of the stock,
securities or other property received directly or indirectly in the transfer.
(2) The name, address, and taxpayer identification number (if available) of the transferor and transferee of the transferred property.
(3) A statement citing the applicable exception to the gain recognition rule and stating why the exception is applicable.
(h) Transfers involving QEF stock.—For rules concerning the effect of a transfer of stock of a
QEF on the section 1295 election, see § 1.1295-1. [Prop. Reg. § 1.1291-6.]
[Proposed 4-1-92.]