Proposed Amendments Regulation § 1.1291-1. Taxation of U.S. persons that are shareholders of section 1291 funds—
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(b)***
(7) Shareholder— Except as otherwise provided in this paragraph (b)(7) or paragraph (e) of this section, a shareholder of a PFIC is a United States person that directly owns stock of a PFIC (a direct shareholder), or that is an indirect shareholder (as defined in paragraph (b)(8) of this section). Notwithstanding the previous sentence, neither a domestic partnership nor an S corporation (as defined in section 1361(a)(1)) is treated as a shareholder of a PFIC. In addition, to the extent that a person is treated under sections 671 through sections 678 as the owner of a portion of a domestic trust, the trust is not treated as a shareholder of a PFIC with respect to PFIC stock held by that portion of the trust, except for purposes of the information reporting requirements of §1.1298-1(b)(3)(i) (imposing an information reporting requirement on domestic liquidating trusts and fixed investment trusts).
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(c)***
(4)***
(i) In general.— If PFIC stock is marked to market for any taxable year under section 475 or any other provision of chapter 1 of the Internal Revenue Code, other than section 1296, regardless of whether the application of such provision is mandatory or results from an election by the shareholder (as defined in paragraph (b)(7) of this section) or another person, then, except as provided in paragraph (c)(4)(ii) of this section, section 1291 and the regulations in this part thereunder do not apply to any distribution with respect to such PFIC stock or to any disposition of such PFIC stock for such taxable year. See §§1.1295-1(i)(3) and 1.1296-1(h)(3)(i) for rules regarding the automatic termination of an existing election under section 1295 or section 1296 when a shareholder marks to market PFIC stock under section 475 or any other provision of chapter 1 of the Internal Revenue Code.
(ii)***
(A) Notwithstanding any provision in this section to the contrary, with respect to a shareholder (as defined in paragraph (b)(7) of this section), the rule of paragraph (c)(4)(ii)(B) of this section applies to the first taxable year in which the shareholder’s PFIC stock is marked to market under a provision of chapter 1 of the Internal Revenue Code, other than section 1296, if such foreign corporation was a PFIC for any taxable year before the taxable year in which the PFIC stock is marked to market, which is during the shareholder’s holding period (as defined in section 1291(a)(3)(A) and §1.1296-1(f)) in such stock, and for which such corporation was not treated as a QEF with respect to such shareholder.
(B) For the first taxable year of a shareholder in which the shareholder’s PFIC stock is marked to market under any provision of chapter 1 of the Internal Revenue Code, other than section 1296, such shareholder, in lieu of the rules under which the stock is marked to market, applies the rules of §1.1296-1(i)(2) and (3) as if an election had been made under section 1296 for such first taxable year.
(5) Coordination with section 1297(d).—
(i) In general.— For purposes of section 1297(d), with respect to a partner or S corporation shareholder that would be considered an indirect shareholder, through its ownership in a domestic partnership or S corporation, with respect to a foreign corporation that is a PFIC and a controlled foreign corporation (as defined in section 957), the term “qualified portion” does not include any portion of such indirect shareholder’s holding period during which it was not a United States shareholder (as defined in section 951(b)) with respect to the foreign corporation.
(ii) Transition rule.— For taxable years of shareholders beginning before [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register], or for taxable years of shareholders of an S corporation in which the S corporation elects to apply §1.958-1(e), for purposes of section 1297(d), a partner’s or S corporation shareholder’s qualified portion with respect to the foreign corporation includes the portion of its holding period during which it—
(A) Is an indirect shareholder under paragraph (b)(8)(iii)(A) or (B) of this section with respect to the foreign corporation; and
(B) Included in gross income its distributive or pro rata share of any amount that the domestic partnership or S corporation, respectively, included under sections 951(a)(1) and 951A(a) with respect to stock in the foreign corporation (treating the requirement in this paragraph (c)(5)(ii)(B) as not satisfied to the extent §1.958-1(d)(1) through (3) is applied with respect to the domestic partnership or S corporation before their general applicability date under §1.958-1(d)(4) or the domestic partnership or S corporation relied on the earlier proposed version of such provisions). See, for example, §1.951A-1(e)(2).
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(j)***
(5) Paragraphs (b)(7), (c)(4)(i), (c)(4)(ii)(A) and (B), and (c)(5) of this section apply to taxable years of shareholders beginning on or after [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register].
For taxable years of shareholders beginning before [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register], see §1.1291-1(b)(7), (c)(4)(i), and (c)(4)(ii)(A) and (B) as in effect and contained in 26 CFR part 1, as revised April 1, 2021. [Prop. Reg. §1.1291-1.]
[Proposed 1-25-2022.]