(a) In general.—A U.S. person that is a shareholder (within the meaning of paragraph (b)(7) of
this section) of a section 1291 fund (as defined in paragraph (b)(2)(v) of this section) is subject to
the special rules under section 1291 and these regulations with respect to gain recognized on
direct and indirect dispositions of stock of the section 1291 fund and upon certain direct and
indirect distributions by the section 1291 fund. This section provides definitions and rules
applicable to all PFICs and their shareholders. For rules governing the taxation of distributions
and dispositions, see § § 1.1291-2 and 1.1291-3, respectively. For rules governing the determination
of the deferred tax amount, see § 1.1291-4. For rules governing the determination of the foreign tax
credit that a shareholder of a section 1291 fund may claim on distributions and certain disposi-
tions, see § 1.1291-5. For rules governing the recognition of gain on a direct or indirect disposition
of stock of a section 1291 fund notwithstanding an otherwise applicable nonrecognition provision,
see § 1.1291-6. For guidance for regulated investment companies making a mark-to-market elec-
tion, see § 1.1291-8. For the time and manner of making the deemed sale and dividend elections
under section 1291(d)(2), see § § 1.1291-9 and 1.1291-10, respectively.
(b) Definitions.—
(1) PFIC.—
(i) In general.—A passive foreign investment company (PFIC)
is a foreign corporation that satisfies either the income test of section 1296(a)(1) or the asset test
of section 1296(a)(2). A corporation will not be treated as a PFIC with respect to a shareholder for
those days included in the shareholder’s holding period before the shareholder became a United
States person within the meaning of section 7701(a)(30).
(ii) PFIC characterization continued.—A corporation will be treated as a PFIC with
respect to a shareholder even if the corporation satisfies neither the income test nor the asset test
of section 1296(a), if the corporation (or its predecessor in a reorganization described in section
368(a)(1)(F)) was a section 1291 fund with respect to the shareholder at any time during the
shareholder’s holding period of the corporation’s stock.
(2) Types of PFICs.—
(i) QEF.—A PFIC is a qualified electing fund (QEF) with respect to
a shareholder that has elected under section 1295 to be taxed currently on its share of the PFIC’s
earnings and profits pursuant to section 1293.
(ii) [Withdrawn by REG-113350-13 on December 31, 2013.]
(iii) Unpedigreed QEF.—A PFIC is an unpedigreed QEF for a taxable year if—
(A) An election under section 1295 is in effect for that year;
(B) The PFIC has been a QEF with respect to the shareholder for at least one,
but not all, of the taxable years that are included wholly or partly in the shareholder’s holding
period of the PFIC stock and during which the corporation was a PFIC; and
(C) The shareholder has not made an election under section 1291(d)(2) and
§ 1.1291-9 or 1.1291-10 with respect to the PFIC to purge the prior PFIC years from the
shareholder’s holding period.
For the effect on a shareholder’s holding period of an election under section 1291(d)(2), see
§ § 1.1291-9(f) and 1.1291-10(f).
(iv) Nonqualified fund.—A PFIC is a nonqualified fund with respect to a shareholder
if the shareholder has not elected under section 1295 to treat the PFIC as a QEF.
(v) [Withdrawn by REG-113350-13 on December 31, 2013.]
(3) PrePFIC year and day.—A prePFIC year is a taxable year (or portion thereof) of the
shareholder, included in its holding period of the stock of a corporation, during which the
corporation was not a PFIC within the meaning of paragraph (b)(1) of this section. A prePFIC day
is a day in a prePFIC year of the shareholder. Thus, the days in a taxable year of a shareholder
beginning after 1986 that are included in a taxable year of the corporation that began before 1987
are prePFIC days.
(4) Prior PFIC year and day.—A prior PFIC year is a taxable year (or portion thereof) of
a shareholder, other than the current shareholder year, included in its holding period of stock of a
corporation during which the corporation was a section 1291 fund. A prior PFIC day is a day in a
prior PFIC year of a shareholder.
(5) Current shareholder year.—The current shareholder year is the taxable year of the
shareholder in which occurs a distribution by, or disposition of stock of, a section 1291 fund.
(6) Stock.—The term stock includes any equity interest in a corporation, without regard
to whether there is a certificate or other representation of the equity interest in the corporation.
For a rule that treats an option holder as a shareholder of a section 1291 fund, see § 1.1291-1(d).
(7) [Withdrawn by REG-113350-13 on December 31, 2013.]
(8) [Withdrawn by REG-113350-13 on December 31, 2013.]
(c) Coordination with QEF rules.—
(1) Pedigreed QEFs.—Section 1291 and these regulations
do not apply to direct and indirect distributions by, and direct and indirect dispositions of stock of,
a PFIC that, with respect to the shareholder, is a pedigreed QEF as defined in paragraph (b)(2)(ii)
of this section.
(2) Unpedigreed QEFs.—Section 1291 and these regulations apply to direct and indirect
distributions by, and direct and indirect dispositions of stock of, a PFIC that, with respect to the
shareholder, is an unpedigreed QEF, as defined in paragraph (b)(2)(iii) of this section. For the
treatment under section 1291 and these regulations of inclusions in income under section 1293(a)
and distributions of amounts not includible in income by reason of section 1293(c), see
§ 1.1291-2(b)(2).
(d) Option holder as shareholder.—If a U.S. person has an option to acquire stock of a PFIC
(other than stock with respect to which the PFIC is a pedigreed QEF), such option is considered
to be stock of a section 1291 fund for purposes of applying section 1291 and these regulations to a
disposition of the option. For purposes of this paragraph (d), the exercise of an option is not a
disposition to which section 1291 applies. For purposes of this paragraph (d), an option to acquire
an option, and each one of a series of such options, are considered an option to acquire stock. For
the holding period of stock acquired upon the exercise of an option, see § 1.1291-1(h)(3).
(e) Exempt organization as shareholder.—If the shareholder of a section 1291 fund is an
organization exempt from tax under this chapter, section 1291 and these regulations apply to such
shareholder only if a dividend from the section 1291 fund would be taxable to the organization
under subchapter F.
(f) Excess distribution from sources within Puerto Rico.—A deferred tax amount, as defined in
§ 1.1291-4, will be determined under section 1291 and these regulations on amounts derived from
sources within Puerto Rico (within the meaning of section 933(1)) by an individual shareholder
who is a bona fide resident of Puerto Rico, but only to the extent such amounts are allocated under
§ 1.1291-2(e)(2) to a taxable year in the shareholder’s holding period during which the share-
holder was not entitled to the benefits of section 933.
(g) Regulated investment companies and real estate investment trusts.—A regulated investment
company, as defined in section 851, and a real estate investment trust, as defined in section 856,
that are shareholders of a section 1291 fund are taxable under section 1291 and these regulations
on direct or indirect distributions from a section 1291 fund and on direct or indirect dispositions of
the stock of a section 1291 fund, and are therefore liable for the deferred tax amount, as defined in
section 1291(c) and § 1.1291-4. For a mark-to-market election that may be made by a regulated
investment company that is a shareholder of a section 1291 fund, see § 1.1291-8.
(h) Holding period.—
(1) In general.—Except as otherwise provided in this paragraph (h),
§ 1.1291-6(b)(5), 1.1291-9(f), or 1.1291-10(f), a shareholder’s holding period of stock of a PFIC is
determined under the general rules of the Code and regulations concerning the holding period of
stock. The following example illustrates the rule of this paragraph (h)(1).
Example. T purchased the stock of FC, a foreign corporation, on December 31, 1985. FC
has qualified as a PFIC since its taxable year beginning January 1, 1987. For purposes of sections
1291 through 1297 and the regulations under those sections, as well as other provisions of the
Code and regulations, T’s holding period of the FC stock began on January 1, 1986.
(2) Stock acquired from U.S. decedent or domestic estate.—For purposes of section 1291
and these regulations, a shareholder’s holding period of a share of stock of a PFIC includes the
period the share was held by another U.S. person if the shareholder acquired the share by reason
of the death of that other U.S. person (the decedent), the PFIC was a section 1291 fund with
respect to the decedent, and the decedent did not recognize gain pursuant to § 1.1291-6(c)(2)(iii)
(or would not have recognized gain had there been any) on the transfer to the shareholder.
(3) Stock acquired upon exercise of option.—The holding period of a share of stock of a
PFIC acquired upon the exercise of an option includes the period the option was held. The
following example illustrates the rule of this paragraph (h)(3).
Example. X is a domestic corporation that owns all of the stock of Y, a PFIC. On January
1, 1993, X issues a debt instrument to G, a U.S. person. Under the terms of the instrument, G may
convert the debt instrument into 20 shares of the stock of Y on any date prior to the maturity date
of December 31, 2002. On August 14, 1997, G exercises the conversion right and receives 20
shares of Y stock. Pursuant to § 1.1291-1(h)(3), G’s holding period of the Y stock begins at the
time of the acquisition of the debt instrument, not at the time of acquisition of the Y stock.
(4) Stock owned directly and indirectly.—
(i) In general.—Except as provided in para-
graph (h)(2), (3), (4)(ii), (5), or (6) of this section, 1.1291-6(b)(5), 1.1291-9(f), or 1.1291-10(f), a
shareholder’s holding period of stock of a PFIC owned indirectly begins on the first day that a
shareholder is considered to own stock of the PFIC (or of another PFIC that was a predecessor of
that PFIC) under § 1.1291-1(b)(8). If a shareholder has owned a share of stock of a PFIC both
directly and indirectly, the shareholder’s holding period of that share begins on the earlier of—
(A) The first day that the shareholder owned the stock of the PFIC directly; or
(B) The first day that the shareholder was an indirect shareholder with respect
to the share of stock of the PFIC (or of another PFIC that was a predecessor of that PFIC).
(ii) Examples.—The following examples illustrate the operation of the rule of para-
graph (h)(4)(i) of this section.
Example 1. A’s holding period of stock of X began on August 14, 1990. X is a
corporation that always has been an S corporation. At the time A acquired the X stock, X held
stock of FC, a PFIC. For purposes of sections 1291 through 1297, A’s holding period of the FC
stock began on August 14, 1990, even though X’s holding period of that stock began on an earlier
day.
Example 2. B, a U.S. person, owns all the stock of FP, a foreign corporation that is
not a PFIC; under section 1223, B’s holding period of the FP stock began on August 1, 1987. FP
owns 50 percent of the stock of FS, a foreign corporation that is not a PFIC; FP’s holding period of
the FS stock began on December 13, 1987. FS owns 10 percent of FC, a PFIC; under section 1223,
FS’s holding period of the FC stock began on November 20, 1986. For purposes of section 1291,
B’s holding period of the FC stock began on December 13, 1987, the first day that ownership of
the FC stock is attributed to B under § 1.1291-1(b)(8).
(iii) Section 1291 fund stock held by former C corporation.—For purposes of
§ 1.1291-2(e)(2)(i), if an S corporation’s holding period of stock of a section 1291 fund includes any
period during which the S corporation was a C corporation, the S corporation shareholder’s
holding period is the S corporation’s holding period of such stock.
(5) New holding period.—If a shareholder recognizes all of the gain realized on a direct
or indirect disposition of stock of a section 1291 fund, within the meaning of § 1.1291-3(c), (d), or
(e), but continues to be a shareholder with respect to such stock immediately after such
disposition, the shareholder’s holding period for such stock will be treated as beginning on the
day after the disposition. For an illustration of this rule as applied to a disposition pursuant to
§ 1.1291-3(d) (regarding pledged stock), see § 1.1291-3(d)(7), Example 1.
(6) Stock transferred to a member of a consolidated return group.—For the holding period
of stock of a section 1291 fund transferred from one member of a consolidated return group to
another member of the group for purposes of § 1.1291-2(e)(2)(i), see § 1.1291-3(f).
(7) PFIC character of holding period.—
(i) In general.—If a shareholder’s holding period
of stock of a PFIC includes a period described in section 1223(1), the character of the days in such
latter period as prePFIC or prior PFIC days is determined by reference to the character of those
days in the shareholder’s holding period immediately prior to the exchange. If a shareholder’s
holding period of stock of a PFIC includes a period described in section 1223(2), the character of
the days in such latter period as prePFIC or prior PFIC days is determined by reference to the
character, immediately prior to the transfer, of those days in the holding period of the person from
whom the stock was acquired.
(ii) Anti-avoidance rule.—If a shareholder’s holding period of stock of a PFIC
includes a period described in section 1223(1), the character of the days in such latter period will
be deemed to be prior PFIC days if a purpose for the exchange described in section 1223(1) was
avoidance of the interest charge rules under section 1291.
(i) [Withdrawn by REG-113350-13 on December 31, 2013.]
(j) Effective date.—
(1) In general.—Except as otherwise provided in this paragraph (j),
§ § 1.1291-1 through 1.1291-9 and the new parts of § 1.1291-10 are effective on April 11, 1992.
However, sections 1291 through 1297, inclusive, are effective for taxable years of foreign corpora-
tions beginning after December 31, 1986. Accordingly, shareholders of PFICs are subject to
sections 1291 through 1297 with respect to transactions occurring within those taxable years.
Shareholders of section 1291 funds, in determining their liability under sections 1291 through
1297 during those years, must apply reasonable interpretations of the statute and legislative
history and employ reasonable methods to preserve the interest charge.
(2) Section 1.1291-3(d)(6).—For purposes of applying section 1297(b)(6), concerning a
disposition resulting from the use of PFIC stock as security for a loan, the transition rule provided
in § 1.1291-3(d)(6) is effective for taxable years of foreign corporations beginning after 1986.
(3) Section 1.1291-8.—Section 1.1291-8 is effective for taxable years of RICs ending after
[INSERT DATE OF PUBLICATION OF THIS DOCUMENT AS A FINAL REGULATION ]. [Reg.
§ 1.1291-1.]
[Proposed 12-31-2013.]