(a) In general.—[Reserved].
(b) Application of section 1295 election.—[Reserved].
(1) Election personal to shareholder.—[Reserved].
(2) Election applicable to specific corporation only—
(i) In general.—[Reserved].
(ii) Stock of QEF received in a nonrecognition transfer.—[Reserved].
(iii) Exception for options.—A shareholder’s section 1295 election does not apply to
any option to buy stock of the PFIC.
(3) Application of general rules to stock held by a pass through entity.—
(i) Stock subject to a
section 1295 election transferred to a pass through entity.—A shareholder’s section 1295 election will
not apply to a domestic pass through entity to which the shareholder transfers stock subject to a
section 1295 election, or to any other U.S. person that is an interest holder or beneficiary of the
domestic pass through entity. However, as provided in paragraph (c)(2)(iv) of this section
(relating to a transfer to a domestic pass through entity of stock subject to a section 1295 election),
a shareholder that transfers stock subject to a section 1295 election to a pass through entity will
continue to be subject to the section 1295 election with respect to the stock indirectly owned
through the pass through entity and any other stock of that PFIC owned by the shareholder.
(ii) Limitation on application of pass through entity’s section 1295 election.—Except
as provided in paragraph (c)(2)(iv) of this section, a section 1295 election made by a domestic
pass through entity does not apply to other stock of the PFIC held directly or indirectly by the
interest holder or beneficiary.
(iii) Effect of partnership termination on section 1295 election.—Termination of a
section 1295 election made by a domestic partnership by reason of the termination of the
partnership under section 708(b) will not terminate the section 1295 election with respect to
partners of the terminated partnership that are partners of the new partnership. Except as
otherwise provided, the stock of the PFIC of which the new partners are indirect shareholders will
be treated as stock of a QEF only if the new domestic partnership makes a section 1295 election
with respect to that stock.
(iv) Characterization of stock held through a pass through entity.—Stock of a PFIC
held through a pass through entity will be treated as stock of a pedigreed QEF with respect to an
interest holder or beneficiary only if—
(A) In the case of PFIC stock acquired (other than in a transaction in which
gain is not recognized pursuant to regulations under section 1291(f) with respect to that stock)
and held by a domestic pass through entity, the pass through entity makes the section 1295
election and the PFIC has been a QEF with respect to the pass through entity for all taxable years
that are included wholly or partly in the pass through entity’s holding period of the PFIC stock and
during which the foreign corporation was a PFIC within the meaning of § 1.1291-9(j)(1); or
(B) In the case of PFIC stock transferred by an interest holder or beneficiary to
a pass through entity in a transaction in which gain is not fully recognized (including pursuant to
regulations under section 1291(f)), the pass through entity makes the section 1295 election with
respect to the PFIC stock transferred for the taxable year in which the transfer was made. The
PFIC stock transferred will be treated as stock of a pedigreed QEF by the pass through entity,
however, only if that stock was treated as stock of a pedigreed QEF with respect to the interest
holder or beneficiary at the time of the transfer, and the PFIC has been a QEF with respect to the
pass through entity for all taxable years of the PFIC that are included wholly or partly in the pass
through entity’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 a partner in a transaction in which gain is not fully recognized, the
PFIC stock will be treated as stock of a pedigreed QEF by the partners only if that stock was
treated as stock of a pedigreed QEF with respect to the partnership for all taxable years of the
PFIC that are included wholly or partly in the partnership’s holding period of the PFIC stock
during which the foreign corporation was a PFIC within the meaning of § 1.1291-9(j), and the
partner has a section 1295 election in effect with respect to the distributed PFIC stock for the
partner’s taxable year in which the distribution was made. If the partner does not have a section
1295 election in effect, the stock shall be treated as stock in a section 1291 fund. See paragraph (k)
of this section for special applicability date of paragraph (b)(3)(v) of this section.
(4) Application of general rules to a taxpayer filing a joint return under section 6013.—A
section 1295 election made by a taxpayer in a joint return, within the meaning of section 6013, will
be treated as also made by the spouse that joins in the filing of that return. See paragraph (k) of
this section for special applicability date of paragraph (b)(4) of this section.
(c) Effect of section 1295 election.—
(1) In general.—Except as otherwise provided in this
paragraph (c), the effect of a shareholder’s section 1295 election is to treat the foreign corporation
as a QEF with respect to the shareholder for each taxable year of the foreign corporation ending
with or within a taxable year of the shareholder for which the election is effective. A section 1295
election is effective for the shareholder’s election year and all subsequent taxable years of the
shareholder unless invalidated, terminated or revoked as provided in paragraph (i) of this section.
The terms shareholder and shareholder’s election year are defined in paragraph (j) of this section.
(2) Years to which section 1295 election applies.—
(i) In general.—Except as otherwise
provided in this paragraph (c), a foreign corporation with respect to which a section 1295 election
is made will be treated as a QEF for its taxable year ending with or within the shareholder’s
election year and all subsequent taxable years of the foreign corporation that are included wholly
or partly in the shareholder’s holding period (or periods) of stock of the foreign corporation.
(ii) Effect of PFIC status on election.—A foreign corporation will not be treated as a
QEF for any taxable year of the foreign corporation that the foreign corporation is not a PFIC
under section 1297(a) and is not treated as a PFIC under section 1298(b)(1). Therefore, a
shareholder shall not be required to include pursuant to section 1293 the shareholder’s pro rata
share of ordinary earnings and net capital gain for such year and shall not be required to satisfy
the section 1295 annual reporting requirement of paragraph (f)(2) of this section for such year.
Cessation of a foreign corporation’s status as a PFIC will not, however, terminate a section 1295
election. Thus, if the foreign corporation is a PFIC in any taxable year after a year in which it is not
treated as a PFIC, the shareholder’s original election under section 1295 continues to apply and
the shareholder must take into account its pro rata share of ordinary earnings and net capital gain
for such year and comply with the section 1295 annual reporting requirement.
(iii) Effect on election of complete termination of a shareholder’s interest in the PFIC.—
Complete termination of a shareholder’s direct and indirect interest in stock of a foreign corpora-
tion will not terminate a shareholder’s section 1295 election with respect to the foreign corpora-
tion. Therefore, if a shareholder reacquires a direct or indirect interest in any stock of the foreign
corporation, that stock is considered to be stock for which an election under section 1295 has been
made and the shareholder is subject to the income inclusion and reporting rules required of a
shareholder of a QEF.
(iv) Effect on section 1295 election of transfer of stock to a domestic pass through
entity.—The transfer of a shareholder’s direct or indirect interest in stock of a foreign corporation
to a domestic pass through entity (as defined in paragraph (j) of this section) will not terminate
the shareholder’s section 1295 election with respect to the foreign corporation, whether or not the
pass through entity makes a section 1295 election. For the rules concerning the application of
section 1293 to stock transferred to a domestic pass through entity, see § 1.1293-1(c).
(v) Examples.—The following examples illustrate the rules of this paragraph (c)(2).
Example 1.
In 1998, C, a U.S. person, purchased stock of FC, a foreign corporation
that is a PFIC. Both FC and C are calendar year taxpayers. C made a timely section 1295 election
to treat FC as a QEF in C’s 1998 return, and FC was therefore a pedigreed QEF. C included its
shares of FC’s 1998 ordinary earnings and net capital gain in C’s 1998 income and did not make a
section 1294 election to defer the time for payment of tax on that income. In 1999, 2000, and 2001,
FC did not satisfy either the income or asset test of section 1296(a), and therefore was neither a
PFIC nor a QEF. C therefore did not have to include its pro rata shares of the ordinary earnings
and net capital gain of FC pursuant to section 1293, or satisfy the section 1295 annual reporting
requirements for any of those years. FC qualified as a PFIC again in 2002. Because C had made a
section 1295 election in 1998, and the election had not been invalidated, terminated, or revoked,
within the meaning of paragraph (i) of this section, C’s section 1295 election remains in effect for
2002. C therefore is subject in 2002 to the income inclusion and reporting rules required of
shareholders of QEFs.
Example 2.
The facts are the same as in Example (1) except that FC did not lose
PFIC status in any year and C sold all the FC stock in 1999 and repurchased stock of FC in 2002.
Because C had made a section 1295 election in 1998 with respect to stock of FC, and the election
had not been invalidated, terminated, or revoked, within the meaning of paragraph (i) of this
section, C’s section 1295 election remained in effect and therefore applies to the stock of FC
purchased by C in 2002. C therefore is subject in 2002 to the income inclusion and reporting rules
required of shareholders of QEFs.
Example 3.
The facts are the same as in Example (2) except that C is a partner in
domestic partnership P and C transferred its FC stock to P in 1999. Because C had made a section
1295 election in 1998 with respect to stock of FC, and the election had not been invalidated,
terminated, or revoked, within the meaning of paragraph (i) of this section, C’s section 1295
election remains in effect with respect to its indirect interest in the stock of FC. If P does not make
the section 1295 election with respect to the FC stock, C will continue to be subject, in C’s capacity
as an indirect shareholder of FC, to the income inclusion and reporting rules required of
shareholders of QEFs in 1999 and subsequent years for that portion of the FC stock C is treated as
owning indirectly through the partnership. If P makes the section 1295 election, C will take into
account its pro rata shares of the ordinary earnings and net capital gain of the FC under the rules
applicable to inclusions of income from P.
(d) Who may make a section 1295 election.—
(1) General rule.—Except as otherwise provided
in this paragraph (d), any U.S. person that is a shareholder (as defined in paragraph (j) of this
section) of a PFIC, including a shareholder that holds stock of a PFIC in bearer form, may make a
section 1295 election with respect to that PFIC. The shareholder need not own directly or
indirectly any stock of the PFIC at the time the shareholder makes the section 1295 election
provided the shareholder is a shareholder of the PFIC during the taxable year of the PFIC that
ends with or within the taxable year of the shareholder for which the section 1295 election is
made. Except in the case of a shareholder that is an exempt organization that may not make a
section 1295 election, as provided in paragraph (d)(6) of this section, in a chain of ownership only
the first U.S. person that is a shareholder of the PFIC may make the section 1295 election.
(2) Application of general rule to pass through entities.—
(i) Partnerships.—
(A) Domestic partnership.—A domestic partnership that holds an interest in stock of a PFIC makes the section
1295 election with respect to that PFIC. The partnership election applies only to the stock of the
PFIC held directly or indirectly by the partnership and not to any other stock held directly or
indirectly by any partner. As provided in § 1.1293-1(c)(1), shareholders owning stock of a QEF by
reason of an interest in the partnership take into account the section 1293 inclusions with respect
to the QEF shares owned by the partnership under the rules applicable to inclusions of income
from the partnership.
(B) Foreign partnership.—A U.S. person that holds an interest in a foreign
partnership that, in turn, holds an interest in stock of a PFIC makes the section 1295 election with
respect to that PFIC. A partner’s election applies to the stock of the PFIC owned directly or
indirectly by the foreign partnership and to any other stock of the PFIC owned by that partner. A
section 1295 election by a partner applies only to that partner.
(ii) S corporation.—An S corporation that holds an interest in stock of a PFIC makes
the section 1295 election with respect to that PFIC. The S corporation election applies only to the
stock of the PFIC held directly or indirectly by the S corporation and not to any other stock held
directly or indirectly by any S corporation shareholder. As provided in § 1.1293-1(c)(1), sharehold-
ers owning stock of a QEF by reason of an interest in the S corporation take into account the
section 1293 inclusions with respect to the QEF shares under the rules applicable to inclusions of
income from the S corporation.
(iii) Trust or estate.—
(A) Domestic trust or estate.—
(1) Nongrantor trust or estate.—
A domestic nongrantor trust or a domestic estate that holds an interest in stock of a PFIC makes
the section 1295 election with respect to that PFIC. The trust or estate’s election applies only to
the stock of the PFIC held directly or indirectly by the trust or estate and not to any other stock
held directly or indirectly by any beneficiary. As provided in § 1.1293-1(c)(1), shareholders owning
stock of a QEF by reason of an interest in a domestic trust or estate take into account the section
1293 inclusions with respect to the QEF shares under the rules applicable to inclusions of income
from the trust or estate.
(2) Grantor trust.—A U.S. person that is treated under sections 671
through 678 as the owner of the portion of a domestic trust that owns an interest in stock of a
PFIC makes the section 1295 election with respect to that PFIC. If that person ceases to be treated
as the owner of the portion of the trust that owns an interest in the PFIC stock and is a beneficiary
of the trust, that person’s section 1295 election will continue to apply to the PFIC stock indirectly
owned by that person under the rules of paragraph (c)(2)(iv) of this section as if the person had
transferred its interest in the PFIC stock to the trust. However, the stock will be treated as stock of
a PFIC that is not a QEF with respect to other beneficiaries of the trust, unless the trust makes the
section 1295 election as provided in paragraph (d)(2)(iii)(A)(1) of this section.
(B) Foreign trust or estate.—
(1) Nongrantor trust or estate.—A U.S. person that
is a beneficiary of a foreign nongrantor trust or estate that holds an interest in stock of a PFIC
makes the section 1295 election with respect to that PFIC. A beneficiary’s section 1295 election
applies to all the PFIC stock owned directly and indirectly by the trust or estate and to the other
PFIC stock owned directly or indirectly by the beneficiary. A section 1295 election by a beneficiary
applies only to that beneficiary.
(2) Grantor trust.—A U.S. person that is treated under sections 671
through 679 as the owner of the portion of a foreign trust that owns an interest in stock of a PFIC
stock makes the section 1295 election with respect to that PFIC. If that person ceases to be treated
as the owner of the portion of the trust that owns an interest in the PFIC stock and is a beneficiary
of the trust, that person’s section 1295 election will continue to apply to the PFIC stock indirectly
owned by that person under the rules of paragraph (c)(2)(iv) of this section. However, as provided
in paragraph (d)(2)(iii)(B)(1) of this section, any other shareholder that is a beneficiary of the
trust and that wishes to treat the PFIC as a QEF must make the section 1295 election.
(iv) Indirect ownership of the pass through entity or the PFIC.—The rules of this
paragraph (d)(2) apply whether or not the shareholder holds its interest in the pass through entity
directly or indirectly and whether or not the pass through entity holds its interest in the PFIC
directly or indirectly.
(3) Indirect ownership of a PFIC through other PFICs.—
(i) In general.—An election
under section 1295 shall apply only to the foreign corporation for which an election is made.
Therefore, if a shareholder makes an election under section 1295 to treat a PFIC as a QEF, that
election applies only to stock in that foreign corporation and not to the stock in any other
corporation which the shareholder is treated as owning by virtue of its ownership of stock in the
QEF.
(ii) Example.—The following example illustrates the rules of paragraph (d)(3)(i) of
this section:
Example.
In 1988, T, a U.S. person, purchased stock of FC, a foreign corporation
that is a PFIC. FC also owns the stock of SC, a foreign corporation that is a PFIC. T makes an
election under section 1295 to treat FC as a QEF. T’s section 1295 election applies only to the
stock T owns in FC, and does not apply to the stock T indirectly owns in SC.
(4) Member of consolidated return group as shareholder.—Pursuant to § 1.1502-77(a), the
common parent of an affiliated group of corporations that join in filing a consolidated income tax
return makes a section 1295 election for all members of the affiliated group. An election by a
common parent will be effective for all members of the affiliated group with respect to interests in
PFIC stock held at the time the election is made or at any time thereafter. A separate election
must be made by the common parent for each PFIC of which a member of the affiliated group is a
shareholder.
(5) Option holder.—A holder of an option to acquire stock of a PFIC may not make a
section 1295 election that will apply to the option or to the stock subject to the option.
(6) Exempt organization.—A tax-exempt organization that is not taxable under section
1291, pursuant to § 1.1291-1(e), with respect to a PFIC may not make a section 1295 election with
respect to that PFIC. In addition, such an exempt organization will not be subject to any section
1295 election made by a domestic pass through entity.
(e) Time for making a section 1295 election.—
(1) In general.—Except as provided in
§ 1.1295-3, a shareholder making the section 1295 election must make the election on or before
the due date, as extended under section 6081 (election due date), for filing the shareholder’s
income tax return for the first taxable year to which the election will apply. The section 1295
election must be made in the original return for that year, or in an amended return, provided the
amended return is filed on or before the election due date.
(2) Examples.—The following examples illustrate the rules of paragraph (e)(1) of this
section:
Example 1.
In 1998, C, a domestic corporation, purchased stock of FC, a foreign
corporation that is a PFIC. Both C and FC are calendar year taxpayers. C wishes to make the
section 1295 election for its taxable year ended December 31, 1998. The section 1295 election
must be made on or before March 15, 1999, the due date of C’s 1998 income tax return as provided
by section 6072(b). On March 14, 1999, C files a request for a three-month extension of time to file
its 1998 income tax return under section 6081(b). C’s time to file its 1998 income tax return and to
make the section 1295 election is thereby extended to June 15, 1999.
Example 2.
The facts are the same as in Example 1 except that on May 1, 1999, C filed its
1998 income tax return and failed to include the section 1295 election. C may file an amended
income tax return for 1998 to make the section 1295 election provided the amended return is filed
on or before the extended due date of June 15, 1999.
(f) Manner of making a section 1295 election and the annual election requirements of the
shareholder.—
(1) Manner of making the election.—A shareholder must make a section 1295
election by—
(i) Completing Form 8621 in the manner required by that form and this section for
making the section 1295 election;
(ii) Attaching Form 8621 to its federal income tax return filed by the election due
date for the shareholder’s election year; and
(iii) Receiving and reflecting in Form 8621 the information provided in the PFIC
Annual Information Statement described in paragraph (g)(1) of this section, the Annual Intermedi-
ary Statement described in paragraph (g)(3) of this section, or the applicable combined statement
described in paragraph (g)(4) of this section, for the taxable year of the PFIC ending with or
within the taxable year for which Form 8621 is being filed. If the PFIC Annual Information
Statement contains a statement described in paragraph (g)(1)(ii)(C) of this section, the share-
holder must attach a statement to Form 8621 that indicates that the shareholder rather than the
PFIC calculated the PFIC’s ordinary earnings and net capital gain.
(2) Annual election requirements.—
(i) In general.—A shareholder that makes a section
1295 election with respect to a PFIC held directly or indirectly, for each taxable year to which the
section 1295 election applies, must—
(A) Complete Form 8621 in the manner required by that form and this section;
(B) Attach Form 8621 to its federal income tax return filed by the due date of
the return, as extended; and
(C) Receive and reflect in Form 8621 the PFIC Annual Information Statement
described in paragraph (g)(1) of this section, the Annual Intermediary Statement described in
paragraph (g)(3) of this section, or the applicable combined statement described in paragraph
(g)(4) of this section, for the taxable year of the PFIC ending with or within the taxable year for
which Form 8621 is being filed. If the PFIC Annual Information Statement contains a statement
described in paragraph (g)(1)(ii)(C) of this section, the shareholder must attach a statement to its
Form 8621 that the shareholder rather than the PFIC provided the calculations of the PFIC’s
ordinary earnings and net capital gain.
(ii) Retention of documents.—For all taxable years subject to the section 1295
election, the shareholder must retain copies of all Forms 8621, with their attachments, and PFIC
Annual Information Statements or Annual Intermediary Statements. Failure to produce those
documents at the request of the Commissioner in connection with an examination may result in
invalidation or termination of the shareholder’s section 1295 election.
(3) Effective date.—See paragraph (k) of this section for special applicability date of
paragraph (f) of this section.
(g) Annual election requirements of the PFIC or intermediary.—
(1) PFIC Annual Information Statement.—For each year of the PFIC ending in a taxable year of a shareholder to which the
shareholder’s section 1295 election applies, the PFIC must provide the shareholder with a PFIC
Annual Information Statement. The PFIC Annual Information Statement is a statement of the
PFIC, signed by the PFIC or an authorized representative of the PFIC, that contains the following
information and representations—
(i) The first and last days of the taxable year of the PFIC to which the PFIC Annual
Information Statement applies;
(ii) Either—
(A) The shareholder’s pro rata shares of the ordinary earnings and net capital
gain (as defined in § 1.1293-1(a)(2)) of the PFIC for the taxable year indicated in paragraph
(g)(1)(i) of this section; or
(B) Sufficient information to enable the shareholder to calculate its pro rata
shares of the PFIC’s ordinary earnings and net capital gain, for that taxable year; or
(C) A statement that the foreign corporation has permitted the shareholder to
examine the books of account, records, and other documents of the foreign corporation for the
shareholder to calculate the amounts of the PFIC’s ordinary earnings and the net capital gain
according to federal income tax accounting principles and to calculate the shareholder’s pro rata
shares of the PFIC’s ordinary earnings and net capital gain;
(iii) The amount of cash and the fair market value of other property distributed or
deemed distributed to the shareholder during the taxable year of the PFIC to which the PFIC
Annual Information Statement pertains; and
(iv) Either—
(A) A statement that the PFIC will permit the shareholder to inspect and copy
the PFIC’s permanent books of account, records, and such other documents as may be maintained
by the PFIC to establish that the PFIC’s ordinary earnings and net capital gain are computed in
accordance with U.S. income tax principles, and to verify these amounts and the shareholder’s pro
rata shares thereof; or
(B) In lieu of the statement required in paragraph (g)(1)(iv)(A) of this section,
a description of the alternative documentation requirements approved by the Commissioner, with
a copy of the private letter ruling and the closing agreement entered into by the Commissioner
and the PFIC pursuant to paragraph (g)(2) of this section.
(2) Alternative documentation.—In rare and unusual circumstances, the Commissioner
will consider alternative documentation requirements necessary to verify the ordinary earnings
and net capital gain of a PFIC other than the documentation requirements described in paragraph
(g)(1)(iv)(A) of this section. Alternative documentation requirements will be allowed only pursu-
ant to a private letter ruling and a closing agreement entered into by the Commissioner and the
PFIC describing an alternative method of verifying the PFIC’s ordinary earnings and net capital
gain. If the PFIC has not obtained a private letter ruling from the Commissioner approving an
alternative method of verifying the PFIC’s ordinary earnings and net capital gain by the time a
shareholder is required to make a section 1295 election, the shareholder may not use an
alternative method for that taxable year.
(3) Annual Intermediary Statement.—In the case of a U.S. person that is an indirect
shareholder of a PFIC that is owned through an intermediary, as defined in paragraph (j) of this
section, an Annual Intermediary Statement issued by an intermediary containing the information
described in paragraph (g)(1) of this section and reporting the indirect shareholder’s pro rata
share of the ordinary earnings and net capital gain of the QEF as described in paragraph
(g)(1)(ii)(A) of this section, may be provided to the indirect shareholder in lieu of the PFIC
Annual Information Statement if the following conditions are satisfied—
(i) The intermediary receives a copy of the PFIC Annual Information Statement or
the intermediary receives an annual intermediary statement from another intermediary which
contains a statement that the other intermediary has received a copy of the PFIC Annual
Information Statement and represents that the conditions of paragraphs (g)(3)(ii) and (g)(3)(iii) of
this section are met;
(ii) The representations and information contained in the Annual Intermediary
Statement reflect the representations and information contained in the PFIC Annual Information
Statement; and
(iii) The PFIC Annual Information Statement issued to the intermediary contains
either the representation set forth in paragraph (g)(1)(iv)(A) of this section, or, if alternative
documentation requirements were approved by the Commissioner pursuant to paragraph (g)(2) of
this section, a copy of the private letter ruling and closing agreement between the Commissioner
and the PFIC, agreeing to an alternative method of verifying PFIC ordinary earnings and net
capital gain as described in paragraph (g)(2) of this section;
(4) Combined statements.—
(i) PFIC Annual Information Statement.—A PFIC that owns
directly or indirectly any stock of one or more PFICs with respect to which a shareholder may
make the section 1295 election may prepare a PFIC Annual Information Statement that combines
with its own information and representations the information and representations of all the PFICs.
The PFIC may use any format for a combined PFIC Annual Information Statement provided the
required information and representations are separately stated and identified with the respective
corporations.
(ii) Annual Intermediary Statement.—An intermediary described in paragraph
(g)(3) of this section that owns directly or indirectly stock of one or more PFICs with respect to
which an indirect shareholder may make the section 1295 election may prepare an Annual
Intermediary Statement that combines with its own information and representations the informa-
tion and representations with respect to all the PFICs. The intermediary may use any format for a
combined Annual Intermediary Statement provided the required information and representations
are separately stated and identified with the intermediary and the respective corporations.
(5) Effective date.—See paragraph (k) of this section for special applicability date of
paragraph (g) of this section.
(h) Transition rules.—Taxpayers may rely on Notice 88-125 (1988-2 C.B. 535) (see
§ 601.601(d)(2) of this chapter), for rules on making and maintaining elections for shareholder
election years (as defined in paragraph (j) of this section) beginning after December 31, 1986, and
before January 1, 1998. Elections made under Notice 88-125 must be maintained as provided in
§ 1.1295-1 for taxable years beginning after December 31, 1997. A section 1295 election made prior
to February 2, 1998, that was intended to be effective for the taxable year of the PFIC that began
during the shareholder’s election year will be effective for that taxable year of the foreign
corporation provided that it is clear from all the facts and circumstances that the shareholder
intended the election to be effective for that taxable year of the foreign corporation.
(i) Invalidation, termination, or revocation of section 1295 election.—
(1) Invalidation or termination of election at the discretion of the Commissioner.—
(i) In general.—The Commissioner, in the
Commissioner’s discretion, may invalidate or terminate a section 1295 election applicable to a
shareholder if the shareholder, the PFIC, or any intermediary fails to satisfy the requirements for
making a section 1295 election or the annual election requirements of this section to which the
shareholder, PFIC, or intermediary is subject, including the requirement to provide, on request,
copies of the books and records of the PFIC or other documentation substantiating the ordinary
earnings and net capital gain of the PFIC.
(ii) Deferral of section 1293 inclusion.—The Commissioner may invalidate any pass
through entity section 1295 election with respect to an interest holder or beneficiary if the section
1293 inclusion with respect to that interest holder or beneficiary is not included in the gross
income of either the pass through entity, an intermediate pass through entity, or the interest
holder or beneficiary within two years of the end of the PFIC’s taxable year due to nonconforming
taxable years of the interest holder and the pass through entity or any intermediate pass through
entity.
(iii) When effective.—Termination of a shareholder’s section 1295 election will be
effective for the taxable year of the PFIC determined by the Commissioner in the Commissioner’s
discretion. An invalidation of a shareholder’s section 1295 election will be effective for the first
taxable year to which the section 1295 election applied, and the shareholder whose election is
invalidated will be treated as if the section 1295 election was never made.
(2) Shareholder revocation.—
(i) In general.—In the Commissioner’s discretion, upon a
finding of a substantial change in circumstances, the Commissioner may consent to a share-
holder’s request to revoke a section 1295 election. Request for revocation must be made by the
shareholder that made the election and at the time and in the manner provided in paragraph
(i)(2)(ii) of this section.
(ii) Time for and manner of requesting consent to revoke.—
(A) Time.—The share-
holder must request consent to revoke the section 1295 election no later than 12 calendar months
after the discovery of the substantial change of circumstances that forms the basis for the
shareholder’s request to revoke the section 1295 election.
(B) Manner of making request.—A shareholder requests consent to revoke a
section 1295 election by filing a ruling request with the Office of the Associate Chief Counsel
(International). The ruling request must satisfy the requirements, including payment of the user
fee, for filing ruling requests with that office.
(iii) When effective.—Unless otherwise determined by the Commissioner, revocation
of a section 1295 election will be effective for the first taxable year of the PFIC beginning after the
date the Commissioner consents to the revocation.
(3) Automatic termination.—If a United States person, or the United States shareholder
on behalf of a controlled foreign corporation, makes an election pursuant to section 1296 and the
regulations thereunder with respect to PFIC stock for which a QEF election is in effect, or marks
to market such stock under another provision of chapter 1 of the Internal Revenue Code, the QEF
election is automatically terminated with respect to such stock that is marked to market under
section 1296 or another provision of chapter 1 of the Internal Revenue Code. Such termination
shall be effective on the last day of the shareholder’s taxable year preceding the first taxable year
for which the section 1296 election is in effect or such stock is marked to market under another
provision of chapter 1 of the Internal Revenue Code.
Example.
Corp Y, a domestic corporation, owns directly 100 shares of marketable stock
in foreign corporation FX, a PFIC. Corp Y also owns a 50 percent interest in FP, a foreign
partnership that owns 200 shares of FX stock. Accordingly, under section 1298(a)(3) and
§ 1.1296-1(e)(1), Corp Y is treated as indirectly owning 100 shares of FX stock. Corp Y also owns
100 percent of the stock of FZ, a foreign corporation that is not a PFIC. FZ owns 100 shares of FX
stock, and therefore under section 1298(a)(2)(A), Corp Y is treated as owning the 100 shares of
FX stock owned by FZ. For taxable year 2005, Corp Y has a QEF election in effect with respect to
all 300 shares of FX stock that it owns directly or indirectly. See generally § 1.1295-1(c)(1). For
taxable year 2006, Corp Y makes a timely election pursuant to section 1296 and the regulations
thereunder. For purposes of section 1296, Corp Y is treated as owning stock held indirectly
through a partnership, but not through a foreign corporation. Section 1296(g); § 1.1296-1(e)(1).
Accordingly, Corp Y’s section 1296 election covers the 100 shares it owns directly and the 100
shares it owns indirectly through FP, but not the 100 shares owned by FZ. With respect to the first
200 shares, Corp Y’s QEF election is automatically terminated effective December 31, 2005. With
respect to the 100 shares Corp Y owns through foreign FZ, Corp Y’s QEF election remains in
effect unless invalidated, terminated, or revoked pursuant to this paragraph (i).
(4) Effect of invalidation, termination, or revocation.—An invalidation, termination, or
revocation of a section 1295 election—
(i) Terminates all section 1294 elections, as provided in § 1.1294-1T(e), and the
undistributed PFIC earnings tax liability and interest thereon are due by the due date, without
regard to extensions, for the return for the last taxable year of the shareholder to which the
section 1295 election applies;
(ii) In the Commissioner’s discretion, results in a deemed sale of the QEF stock on
the last day of the PFIC’s last taxable year as a QEF, in which gain, but not loss, will be recognized
and with respect to which appropriate basis and holding period adjustments will be made; and
(iii) Subjects the shareholder to any other terms and conditions that the Commis-
sioner determines are necessary to ensure the shareholder’s compliance with sections 1291
through 1298 or any other provisions of the Code.
(5) Effect after invalidation, termination, or revocation.—
(i) In general.—Without the
Commissioner’s consent, a shareholder whose section 1295 election was invalidated, terminated,
or revoked under this paragraph (i) may not make the section 1295 election with respect to the
PFIC before the sixth taxable year in which the invalidation, termination, or revocation became
effective.
(ii) Special rule.—Notwithstanding paragraph (i)(5)(i) of this section, a shareholder
whose section 1295 election was terminated pursuant to paragraph (i)(3) of this section, and either
whose section 1296 election has subsequently been terminated because its PFIC stock ceased to
be marketable or who no longer marks to market such stock under another provision of chapter 1
of the Internal Revenue Code, may make a section 1295 election with respect to its PFIC stock
before the sixth taxable year in which its prior section 1295 election was terminated.
(j) Definitions.—For purposes of this section—
Intermediary is a nominee or shareholder of record that holds stock on behalf of the
shareholder or on behalf of another person in a chain of ownership between the shareholder and
the PFIC, and any direct or indirect beneficial owner of PFIC stock (including a beneficial owner
that is a pass through entity) in the chain of ownership between the shareholder and the PFIC.
Pass through entity is a partnership, S corporation, trust, or estate.
Shareholder has the same meaning as the term shareholder in § 1.1291-9(j)(3), except that for
purposes of this section, a partnership and an S corporation also are treated as shareholders.
Furthermore, unless otherwise provided, an interest holder of a pass through entity, which is
treated as a shareholder of a PFIC, also will be treated as a shareholder of the PFIC.
Shareholder’s election year is the taxable year of the shareholder for which it made the section
1295 election.
(k) Effective dates.—Except as otherwise provided, paragraphs (b)(2)(iii), (b)(3), (b)(4), and
(c) through (j) of this section are applicable to taxable years of shareholders beginning after
December 31, 1997. However, taxpayers may apply the rules under paragraphs (b)(4), (f) and (g)
of this section to a taxable year beginning before January 1, 1998, provided the statute of
limitations on the assessment of tax has not expired as of April 27, 1998, and, in the case of
paragraph (b)(4) of this section, the taxpayers who filed the joint return have consistently applied
the rules of that section to all taxable years following the year the election was made. Paragraph
(b)(3)(v) of this section is applicable as of February 7, 2000, however, a taxpayer may apply the
rules to a taxable year prior to the applicable date provided the statute of limitations on the
assessment of tax for that taxable year has not expired. Paragraphs (i)(3) and (i)(5)(ii) of this
section are applicable for taxable years beginning on or after May 3, 2004. [Reg. § 1.1295-1.]
[T.D. 8750, 12-31-97. Redesignated and amended by T.D. 8870, 2-4-2000. Amended by T.D.
9123, 4-30-2004.]