Qualified electing funds
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(b) ***
(3) Application of general rules to stock held by a pass through entity.—
(i) Stock subject to a section 1295 election transferred to a domestic nongrantor trust or domestic estate.— A shareholder’s section 1295 election will not apply to a domestic nongrantor trust or domestic estate to which the shareholder transfers stock subject to a section 1295 election, or to any other United States person that is a beneficiary of the domestic nongrantor trust or estate. However, as provided in paragraph (c)(2)(iv) of this section (relating to a transfer to a domestic pass through entity of stock subject to a section 1295 election), a shareholder that transfers stock subject to a section 1295 election to a domestic nongrantor trust or domestic estate will continue to be subject to the section 1295 election with respect to the stock indirectly owned through the domestic nongrantor trust or domestic estate and any other stock of that PFIC owned by the shareholder.
(ii) Limitation on application of domestic nongrantor trust’s or domestic estate’s section 1295 election.— Except as provided in paragraph (c)(2)(iv) of this section, a section 1295 election made by a domestic nongrantor trust or domestic estate does not apply to other stock of the PFIC held directly or indirectly by the beneficiary.
(iii) Effect of partnership termination on preexisting partnership section 1295 election.— The termination of a preexisting partnership section 1295 election (within the meaning of paragraph (d)(2)(i)(B) of this section) by reason of the termination of the partnership under section 708(b) will not terminate the section 1295 election with respect to partners of the terminated partnership that are partners of the new partnership (continuing partners). The stock of the PFIC of which a new partner (partners other than continuing partners) is an indirect shareholder will be treated as stock of a QEF with respect to such partner only if the new partner makes or has made a section 1295 election with respect to that stock under paragraph (d)(2)(i)(A) of this section.
(iii) Characterization of stock held through a pass-through entity.— Stock of a PFIC held through a pass-through entity will be treated as stock of a pedigreed QEF with respect to a shareholder (as defined in paragraph (j)(3) of this section) that is treated as owning such stock by reason of an interest in the pass-through entity only if—
(A) In the case of PFIC stock acquired (other than in a transaction in which gain is not fully recognized, including pursuant to regulations in this part under section 1291(f)) and held by a domestic pass-through entity, the domestic pass-through entity has made a preexisting section 1295 election under paragraph (d)(2)(i)(B) or (d)(2)(ii)(B) of this section, or makes an election under paragraph (d)(2)(iii)(A)(1) of this section, and the PFIC has been a QEF with respect to the pass-through entity for all taxable years that are included in the pass-through entity’s holding period of the PFIC stock and during which the foreign corporation was a PFIC within the meaning of §1.1291-9(j)(1);
(B) In the case of PFIC stock acquired (other than in a transaction in which gain is not fully recognized, including pursuant to regulations in this part under section 1291(f)) and held by a domestic pass-through entity, other than PFIC stock described in paragraph (b)(3)(iv)(A) of this section, through which the shareholder is treated as owning such PFIC stock, the shareholder makes the section 1295 election
under paragraph (d)(2)(i)(A), (d)(2)(ii)(A), (d)(2)(iii)(A)(2), or (d)(2)(iii)(B) of this section, and the PFIC has been a QEF with respect to the shareholder for all taxable years that are included in the shareholder’s holding period for the PFIC stock, and during which the foreign corporation was a PFIC within the meaning of §1.1291-9(j)(1); or
(C) In the case of PFIC stock transferred by an interest holder or beneficiary to a pass-through entity in a transaction in which gain is not fully recognized (including pursuant to regulations in this part under section 1291(f)), if the pass-through entity made a preexisting section 1295 election under paragraph (d)(2)(i)(B) or (d)(2)(ii)(B) of this section with respect to the PFIC stock, or the shareholder or pass-through entity, as applicable, makes a section 1295 election under paragraph (d)(2)(i)(A), (d)(2)(ii)(A), (d)(2)(iii)(A)(1) or (2), or (d)(2)(iii)(B) of this section, in each case for the taxable year in which the transfer was made, or the shareholder’s section 1295 election continues pursuant to paragraph (c)(2)(iv) of this section. If the foreign corporation was a PFIC within the meaning of §1.1291-9(j) at the time of the transfer, the PFIC stock transferred will be treated as stock of a pedigreed QEF with respect to a transferor, however, only if that stock was treated as stock of a pedigreed QEF with respect to the transferor at the time of the transfer. In all cases subject to this paragraph (b)(3)(iv)(C), the PFIC stock will be treated as stock of a pedigreed QEF only if the PFIC has been a QEF for all taxable years of the PFIC that are included wholly or partly in the shareholder’s holding period of the PFIC stock during which the foreign corporation was a PFIC within the meaning of §1.1291-9(j).
(iv) Characterization of stock held through a pass-through entity.— Stock of a PFIC held through a pass-through entity will be treated as stock of a pedigreed QEF with respect to a shareholder (as defined in paragraph (j)(3) of this section) that is treated as owning such stock by reason of an interest in the pass-through entity only if—
(A) In the case of PFIC stock acquired (other than in a transaction in which gain is not fully recognized, including pursuant to regulations in this part under section 1291(f)) and held by a domestic pass-through entity, the domestic pass-through entity has made a preexisting section 1295 election under paragraph (d)(2)(i)(B) or (d)(2)(ii)(B) of this section, or makes an election under paragraph (d)(2)(iii)(A)(1) of this section, and the PFIC has been a QEF with respect to the pass-through entity for all taxable years that are included in the pass-through entity’s holding period of the PFIC stock and during which the foreign corporation was a PFIC within the meaning of §1.1291-9(j)(1);
(B) In the case of PFIC stock acquired (other than in a transaction in which gain is not fully recognized, including pursuant to regulations in this part under section 1291(f)) and held by a domestic pass-through entity, other than PFIC stock described in paragraph (b)(3)(iv)(A) of this section, through which the shareholder is treated as owning such PFIC stock, the shareholder makes the section 1295 election
under paragraph (d)(2)(i)(A), (d)(2)(ii)(A), (d)(2)(iii)(A)(2), or (d)(2)(iii)(B) of this section, and the PFIC has been a QEF with respect to the shareholder for all taxable years that are included in the shareholder’s holding period for the PFIC stock, and during which the foreign corporation was a PFIC within the meaning of §1.1291-9(j)(1); or
(C) In the case of PFIC stock transferred by an interest holder or beneficiary to a pass-through entity in a transaction in which gain is not fully recognized (including pursuant to regulations in this part under section 1291(f)), if the pass-through entity made a preexisting section 1295 election under paragraph (d)(2)(i)(B) or (d)(2)(ii)(B) of this section with respect to the PFIC stock, or the shareholder or pass-through entity, as applicable, makes a section 1295 election under paragraph (d)(2)(i)(A), (d)(2)(ii)(A), (d)(2)(iii)(A)(1) or (2), or (d)(2)(iii)(B) of this section, in each case for the taxable year in which the transfer was made, or the shareholder’s section 1295 election continues pursuant to paragraph (c)(2)(iv) of this section. If the foreign corporation was a PFIC within the meaning of §1.1291-9(j) at the time of the transfer, the PFIC stock transferred will be treated as stock of a pedigreed QEF with respect to a transferor, however, only if that stock was treated as stock of a pedigreed QEF with respect to the transferor at the time of the transfer. In all cases subject to this paragraph (b)(3)(iv)(C), the PFIC stock will be treated as stock of a pedigreed QEF only if the PFIC has been a QEF for all taxable years of the PFIC that are included wholly or partly in the shareholder’s holding period of the PFIC stock during which the foreign corporation was a PFIC within the meaning of §1.1291-9(j).
(v) Characterization of stock distributed by a partnership.— In the case of PFIC stock distributed by a partnership to one or more partners in a transaction in which gain is not fully recognized (including pursuant to regulations in this part under section 1291(f)), the PFIC stock will be treated as stock of a pedigreed QEF by a shareholder only if that stock was treated as stock of a pedigreed QEF with respect to the shareholder immediately before the distribution, or, in the case of a distribution of PFIC stock by a partnership to one or more partners in the first year of the distributee partner or partners’ holding period of the PFIC stock, the distributee partner or partners make an election as provided in paragraph (d)(2) of this section.
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(d) ***
(1) General rule.— Except as otherwise provided in this paragraph (d), any shareholder (as defined in paragraph (j)(3) of this section) of a PFIC, including a shareholder that holds stock of a PFIC in bearer form, may make a section 1295 election with respect to that PFIC. The shareholder need not own directly or indirectly any stock of the PFIC when the shareholder makes the section 1295 election provided the shareholder is a shareholder of the PFIC during the taxable year of the PFIC that ends with or within the taxable year of the shareholder for which the section 1295 election is made.
(2) ***
(i) ***
(A) In general.— If a partnership (domestic or foreign) holds stock of a PFIC, the section 1295 election with respect to such PFIC is made by a shareholder (as defined in paragraph (j)(3) of this section) indirectly owning the PFIC stock by reason of its interest in the partnership. A section 1295 election made by a shareholder under this paragraph (d)(2)(i)(A) applies to the stock of the PFIC indirectly owned by the shareholder by reason of its interest in the partnership and to any other stock of the PFIC owned by the shareholder. A shareholder making an election under this paragraph (d)(2)(i)(A) must do so in the form and manner provided in paragraph (f) of this section. The shareholder must also notify the partnership of the election no later than 30 days after filing the return in which the election is made; the shareholder may notify the partnership in any reasonable manner. However, the failure of the shareholder to notify the partnership of its election does not invalidate an otherwise valid election under this paragraph (d)(2)(i)(A). A shareholder making an election under this paragraph (d)(2)(i)(A) accounts for its pro rata share of ordinary earnings and net capital gain attributable to the QEF stock as provided in §1.1293-1(c)(1).
(B) Preexisting section 1295 election by domestic partnership.— Any section 1295 election made by a domestic partnership with respect to a PFIC effective for taxable years of the PFIC ending on or before [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register] (preexisting partnership section 1295 election) will be treated as if it were made by each shareholder that is treated as owning stock in the PFIC by reason of its interest in the domestic partnership on or before such date, and the stock in the PFIC will continue to be treated as stock in a QEF to such shareholder; any partner that becomes a shareholder of the PFIC by acquiring an interest in the domestic partnership after [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register] and wishes to have a section 1295 election applicable with respect to the PFIC may make a section 1295 election under paragraph (d)(2)(i)(A) of this section with respect to stock treated as owned by reason of its interest in the domestic partnership. A shareholder that is treated as owning stock of a QEF by reason of an interest in a domestic partnership that has made a preexisting partnership section 1295 election accounts for its pro rata share of the ordinary earnings and net capital gain attributable to such QEF stock as provided in §1.1293-1(c)(1).
(ii) S corporation.
(A) In general.— If an S corporation holds stock of a PFIC, the section 1295 election with respect to such PFIC is made by a shareholder (as defined in paragraph (j)(3) of this section) indirectly owning the PFIC stock by reason of its interest in the S corporation. A section 1295 election made by a shareholder under this paragraph (d)(2)(ii)(A) applies to the stock of the PFIC held by the shareholder by reason of its interest in the S corporation and to any other stock of the PFIC held by the shareholder. A shareholder making an election under this paragraph (d)(2)(ii)(A) must do so in the form and manner provided in paragraph (f) of this section. The shareholder must also notify the S corporation of the election no later than 30 days after filing the return in which the election is made; the shareholder may notify the S corporation in any reasonable manner. However, the failure of the shareholder to notify the S corporation of its election does not invalidate an otherwise valid election under this paragraph (d)(2)(ii)(A). A shareholder making an election under this paragraph (d)(2)(ii)(A) accounts for its pro rata share of ordinary earnings and net capital gain attributable to the QEF stock as provided in §1.1293-1(c)(1)
(B) Preexisting section 1295 election by S corporation.— Any section 1295 election made by an S corporation with respect to a PFIC effective for taxable years of such PFIC ending on or before [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register] (preexisting S corporation section 1295 election) will be treated as if it were made by each shareholder that is treated as owning stock in the PFIC by reason of its interest in the S corporation on or before such date, and the stock in the PFIC will continue to be treated as stock in a QEF to such shareholder; any S corporation shareholder that becomes a shareholder of the PFIC by acquiring an interest in the S corporation after [date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register] and wishes to have a section 1295 election applicable with respect to the PFIC may make a section 1295 election under paragraph (d)(2)(ii)(A) of this section with respect to stock treated as owned by reason of its interest in the S corporation. A shareholder that is treated as owning stock of a QEF by reason of an interest in an S corporation that has made a preexisting S corporation section 1295 election accounts for its pro rata share of the ordinary earnings and net capital gain attributable to the QEF stock as provided in §1.1293-1(c)(1).
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(f) ***
(2) ***
(i) In general.— A shareholder that makes a section 1295 election with respect to a PFIC, or a shareholder that is treated as owning stock in a QEF by reason of an interest in a domestic partnership that has made a preexisting partnership section 1295 election (within the meaning of paragraph (d)(2)(i)(B) of this section) or by reason of an interest in an S corporation that has made a preexisting S corporation section 1295 election (within the meaning of paragraph (d)(2)(ii)(B) of this section), for each taxable year to which the section 1295 election applies, must—
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(3) Preexisting partnership or S corporation section 1295 election.— A shareholder that is treated as owning stock in a QEF by reason of an interest in a domestic partnership that has made a preexisting partnership section 1295 election or by reason of an interest in an S corporation that has made a preexisting S corporation section 1295 election does not need to make a section 1295 election with respect to such QEF under the rules of paragraph (f)(1) of this section. However, such shareholder must comply with the annual election requirements as provided in paragraph (f)(2) of this section.
(4) Notice requirement for partners and S corporation shareholders.— See paragraphs (d)(2)(i)(A) and (d)(2)(ii)(A) of this section for a notice
requirement for partners and S corporation shareholders making a section 1295 election under this section. * * * * *
(j) Definitions.— For purposes of this section—
(1) Intermediary.— The term intermediary means a nominee or shareholder of record that holds stock on behalf of the shareholder or on behalf of another person in a chain of ownership between the shareholder and the PFIC, and any direct or indirect beneficial owner of PFIC stock (including a beneficial owner that is a pass-through entity) in the chain of ownership between the shareholder and the PFIC.
(2) Pass-through entity.— The term pass-through entity means a partnership, S corporation, trust, or estate.
(3) Shareholder.— The term shareholder has the meaning provided in §1.1291-1(b)(7).
(4) Shareholder’s election year.— The term shareholder’s election year means the taxable year of the shareholder for which it makes the section 1295 election.
(k) Applicability dates— *** Paragraphs (b)(3), (d)(1), (d)(2)(i) and (ii), (f)(2)(i), (f)(3) and (4), and (j) 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 §1.1295-1(b)(3), (d)(1), (d)(2)(i) and (ii), (f)(2)(i), (i)(1)(ii), and (j) as in effect and contained in 26 CFR part 1, as revised April 1, 2021. [Prop. Reg. §1.1295-1.]
[Proposed 1-25-2022.]