SUMMARY: This document contains temporary regulations that provide 
guidance to a passive foreign investment company (PFIC) shareholder 
that makes the election under section 1295 (section 1295 election) to 
treat the PFIC as a qualified electing fund (QEF). This document also 
contains temporary regulations that provide guidance for shareholders 
that wish to make a section 1295 election that will apply on a 
retroactive basis (retroactive election). In addition, this document 
contains a temporary regulation that provides guidance under section 
1291 to a PFIC shareholder that is a tax-exempt organization. Temporary 
regulations are needed to provide taxpayers additional time to satisfy 
certain requirements to make the section 1295 election. The text of 
these temporary regulations also serves as the text of proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register. In addition, this document removes Sec. 1.1291-9(i)(1) of the 
final regulations, and amends Sec. 1.1297-3T. References to sections 
1296 and 1297 in this document are references to sections 1296 and 1297 
as in effect before the effective date of section 1122(a) of the Tax 
Relief Act of 1997.

DATES: These regulations are effective January 2, 1998.
    For dates of applicability, see Secs. 1.1291-1T(e)(2), 1.1293-
1T(a)(2)(ii), 1.1293-1T(c)(3), 1.1295-1T(k), 1.1295-3T(h), and Sec. 1.1297-3T(c)(3) 
of these regulations.

FOR FURTHER INFORMATION CONTACT:
Gayle Novig, (202) 622-3840 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collections of information contained in these 
regulations have been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget under 
control number 1545-1555. Responses to these collections of information 
are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    For further information concerning these collections of 
information, and where to submit comments on the collections of 
information and the accuracy of the estimated burden, and suggestions 
for reducing this burden, please refer to the preamble to the cross-
referencing notice of proposed rulemaking published in the Proposed 
Rules section of this issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under sections 1291, 1293, 1295, and 1297 of the Internal 
Revenue Code. Sections 1291, 1293, 1295, and 1297 were added by the Tax 
Reform Act of 1986, effective for taxable years of foreign corporations 
beginning after December 31, 1986. As originally enacted, the section 
1295 election was an election made by the PFIC. The Technical and 
Miscellaneous Revenue Act of 1988 (TAMRA) amended section 1295, 
effective for taxable years of foreign corporations beginning after 
December 31, 1986, to change the section 1295 election to a 
shareholder-by-shareholder election. Sections 1291, 1293, and 1297 also 
were amended by TAMRA; sections 1293 and 1297 were further amended by 
the Omnibus Budget Reconciliation Act of 1993. Section 1297 also was 
amended by the Revenue Reconciliation Act of 1989 and the Small 
Business Job Protection Act of 1996. In addition, the Taxpayer Relief 
Act of 1997 (1997 TRA) amended section 1 to provide categories of long-
term capital gain and the maximum rates of tax to which the categories 
are subject. In certain cases, this amendment affects the calculation 
of net capital gain for purposes of section 1293.
    Guidance for making the election under section 1295 was first 
provided on March 2, 1988, in the Federal Register (53 FR 6770), with 
the publication of temporary regulations (TD 8178) relating to the 
section 1295 election. These temporary regulations provided guidance to 
PFICs making the section 1295 election and therefore became obsolete 
with the 1988 amendment to section 1295. The Internal Revenue Service 
published Notice 88-125, 1988-2 C.B. 535, to provide guidance to 
shareholders making the section 1295 election under section 1295, as 
amended. Notice 88-125 was an administrative pronouncement, as that 
term is used in Sec. 1.6661-3(b)(2) of the Income Tax Regulations, and 
taxpayers could rely on Notice 88-125 to the same extent as a revenue 
ruling or a revenue procedure. Notice 88-125 stated that taxpayers 
could rely on the notice until regulations were published, and that 
those regulations would be effective for taxable years beginning after 
December 31, 1986.
    Proposed regulations published April 1, 1992 (57 FR 11024), provide 
a general rule regarding the application of section 1291 to a PFIC 
shareholder that is an organization exempt from tax under chapter 1. In 
addition, these proposed regulations provide general rules regarding 
the application of section 1293 and special rules regarding the 
application of section 1295, including rules with respect to transfers 
of PFIC stock subject to a section 1295 election. Proposed regulation 
Sec. 1.1295-2, published December 24, 1996 (61 FR 67752), permits 
certain shareholders to make a special section 1295 election with 
respect to certain preferred stock. Proposed regulation Sec. 1.1293-2, 
also published December 24, 1996 (61 FR 67752), provides the special 
inclusion rules applicable to shareholders that make the special 
section 1295 election with respect to their preferred stock.
    Temporary regulations Sec. 1.1297-3T, published March 2, 1988 (53 
FR 6770), provides guidance for making the deemed sale election under 
section 1297(b)(1) to purge the PFIC taint from stock of a foreign 
corporation that is treated as stock of a PFIC under section 
1297(b)(1). Section 1.1291-9(i)(1) of the regulations, published 
December 27, 1996 (61 FR 68149), provides that the deemed dividend 
election rules of Sec. 1.1291-9 do not apply to elections made under 
section 1297(b)(1). A similar rule had been provided in temporary 
regulations published April 1, 1992 (52 FR 10992). The temporary 
regulations, which had been effective April 1, 1992, sunset April 1, 
1995.
    Treasury and the Service believe that immediate guidance in the 
form of temporary regulations regarding the section 1295 election is 
necessary. First, the regulations provide significant new QEF election 
procedures that are beneficial to taxpayers. For example, the 
regulations provide procedures for both retroactive and protective 
elections. The benefits provided by these changes may be jeopardized, 
or simply unavailable (as a result of closed taxable years), if 
taxpayers cannot immediately rely on them. Second, although the 
regulations embody guidance already provided in Notice 88-125, the 
regulations significantly reduce the burden for making and maintaining 
the election and clarify, most often in favor of taxpayers, significant 
ambiguities left by the Notice. Treasury and the Service believe that 
the benefits of immediate guidance significantly outweigh any advantage 
obtained by issuing the regulations in proposed form only because these 
temporary regulations prevent prejudice to taxpayers as a consequence 
of a further delay in guidance and because they benefit taxpayers by 
providing additional time to make certain elections. Finally, the 
temporary regulations provide guidance concerning the manner in which 
section 1(h), which was added to the Code by 1997 TRA, effective for 
taxable years ending after May 6, 1997, applies to determine the net 
capital gain of the PFIC and the QEF shareholder's pro rata share of 
the net capital gain. Therefore, it would be impractical and contrary 
to public interest to issue this Treasury decision with prior notice 
under section 553(b) of title 5 of the United States Code.

Explanation of Provisions

    A foreign corporation is a passive foreign investment company 
(PFIC) for a taxable year if the foreign corporation satisfies either 
the income or asset test of section 1296(a) for that year. A foreign 
corporation is a PFIC under the income test if 75 percent or more of 
its gross income for its taxable year is passive, or investment-type, 
income. Alternatively, under the asset test, a foreign corporation is a PFIC if 
50 percent or more of the average fair market value of its assets 
during its taxable year are assets that produce or are held for the 
production of passive income. A shareholder of a foreign corporation 
that qualifies as a PFIC is subject to the interest charge regime of 
section 1291 with respect to certain distributions by the PFIC and 
certain dispositions of its stock. Generally, a shareholder may avoid 
the interest charge regime by making a timely election under section 
1295 to treat a PFIC as a QEF, in which case the shareholder will be 
taxable annually under section 1293 on its pro rata shares of the 
ordinary ordinary earnings and net capital gain of the PFIC. Under 
section 1295(a), a section 1295 election will apply with respect to the 
PFIC if the PFIC complies with requirements prescribed by the Secretary 
for purposes of determining the ordinary earnings and net capital gain 
of the PFIC and otherwise carrying out the purposes of the PFIC 
provisions.
    Section 1295(b)(1) provides that a shareholder may make a section 
1295 election with respect to a PFIC for any taxable year of the 
shareholder (shareholder election year). Once made, the election will 
apply to that year and to all subsequent years of the shareholder 
unless revoked with the consent of the Secretary. Section 1295(b)(2) 
prescribes the time for making the election. In general, for the 
section 1295 election to be applicable to a taxable year, the 
shareholder must make the election by the due date, as extended under 
section 6081, for the shareholder's return for that taxable year. 
However, to the extent provided in regulations, a section 1295 election 
may be made for a taxable year after the time required if the 
shareholder failed to make a timely election because the shareholder 
reasonably believed that the foreign corporation was not a PFIC.
    This document provides temporary regulations that interpret 
sections 1291, 1293, 1295, and 1297. In particular, the temporary 
regulations incorporate the rules of Notice 88-125, with certain 
modifications. The temporary regulations also clarify the rules of the 
notice and proposed regulation Sec. 1.1295-1(b) with respect to the 
application of section 1295 to options, lapse of PFIC status, cessation 
of ownership of PFIC stock, transfer of stock subject to a section 1295 
election to a pass through entity, and tax-exempt organizations. The 
temporary regulations also provide rules regarding invalidation, 
termination and revocation of a section 1295 election. In addition, the 
temporary regulations introduce rules for making a retroactive 
election. Finally, the temporary regulations provide guidance 
concerning the application of the deemed dividend election rules to 
elections under section 1297(b)(1).

1. Rules of Notice 88-125

    Temporary regulation Sec. 1.1295-1T(c) through (g) adopts the rules 
provided in Notice 88-125, with certain modifications. These 
modifications reflect certain comments received with respect to the 
notice.
    Notice 88-125 describes the requirements a shareholder must satisfy 
to make and maintain a section 1295 election. In particular, each year 
the shareholder must file Form 8621 with its income tax return and 
attach a PFIC Annual Information Statement (described below). In the 
year of election, the shareholder also must attach a Shareholder 
Election Statement. Notice 88-125 requires satisfaction of the election 
and annual reporting requirements with respect to each PFIC for which 
the shareholder makes the section 1295 election.
    Commenters indicated that these election and annual reporting 
requirements are burdensome, especially if the shareholder is making 
the election with respect to many foreign corporations. In response to 
the comments, the temporary regulations change these requirements to 
reduce the burden on the electing shareholder. First, the temporary 
regulations eliminate the need to file a Shareholder Election 
Statement. Second, the temporary regulations eliminate the need to file 
a copy of the PFIC Annual Information Statement with Form 8621 and 
require instead that the shareholder retain a copy of the PFIC Annual 
Information Statement for production upon examination by the Service. 
Thus, to make and maintain a section 1295 election, the shareholder 
need only file Form 8621 for each PFIC on an annual basis and maintain 
records to support the information entered on that form.
    Notice 88-125 imposes certain requirements on PFICs and on 
intermediaries through which shareholders own PFIC stock. The notice 
requires a PFIC to provide its shareholders with a PFIC Annual 
Information Statement containing information necessary to determine 
each shareholder's yearly income inclusion. In the case of indirect 
ownership of PFIC stock, a nominee or shareholder of record that has 
received a PFIC Annual Information Statement may issue its own 
statement to the shareholder containing the relevant information in 
lieu of passing on the PFIC Annual Information Statement.
    The temporary regulations allow PFICs and intermediaries more 
flexibility in fulfilling these requirements. A PFIC that owns directly 
or indirectly any shares of one or more PFICs may provide its 
shareholders with a PFIC Annual Information Statement in which it 
combines the required information and representations of the PFIC and 
any lower tier PFICs. The PFIC may use any format for a combined PFIC 
Annual Information Statement provided the required information and 
representations are clearly presented and identified with the 
respective corporations. Similarly, an intermediary through which a 
shareholder indirectly holds stock in more than one PFIC may provide 
the shareholder a combined statement based on multiple PFIC Annual 
Information Statements. Comments are requested concerning alternative 
reporting methods that could further reduce the burden on electing 
shareholders.
    As provided in Notice 88-125, the PFIC Annual Information Statement 
must include the shareholder's pro rata shares of the ordinary earnings 
and net capital gain of the PFIC for the PFIC's taxable year or 
information that will enable the shareholder to calculate its pro rata 
shares. In addition, the PFIC Annual Information Statement must contain 
information about distributions to shareholders and a statement that 
the PFIC will permit the shareholder to inspect and copy its permanent 
books of account, records, and other documents of the PFIC necessary to 
determine that the ordinary earnings and net capital gain of the PFIC 
have been calculated according to federal income tax accounting 
principles. Commenters indicated that it was unclear in the notice 
whether a shareholder, rather than the PFIC, could calculate the 
requisite federal income tax information with respect to a PFIC that 
did not keep its books and records according to U.S. Tax accounting 
rules. In response to the comments, the temporary regulations clarify 
that a shareholder may obtain the books, records and other documents of 
the foreign corporation necessary for the shareholder to determine the 
correct earnings and profits and net capital gain of the PFIC according 
to federal income tax principles and calculate the shareholder's pro 
rata shares of the PFIC's ordinary earnings and net capital gain. The 
temporary regulations provide that, in that case, the PFIC must include 
a statement in its PFIC Annual Information Statement that it has 
permitted the shareholder to examine the PFIC's books of account, 
records, and other documents necessary for the shareholder to calculate the 
amounts of ordinary earnings and net capital gain.
    Notice 88-125 provides that a domestic partnership makes the 
section 1295 election rather than each individual partner that is an 
indirect shareholder of the PFIC by reason of the partner's interest in 
the partnership. The notice also provides that an S corporation makes 
the section 1295 election. This entity-level election in the case of 
domestic partnerships and S corporations reflects the view that 
multiple elections by the partners or S corporation shareholders would 
be more burdensome than the single entity-level election. The temporary 
regulations adopt the rules of the notice with respect to elections by 
domestic pass through entities, clarifying that the section 1295 
election with respect to stock owned directly or indirectly by a 
domestic trust or estate generally is also made at the entity level. 
The temporary regulations also adopt the rules of the notice with 
respect to interests held by foreign pass through entities. Interest 
holder in foreign partnerships, trusts, and estates must make the 
section 1295 election with respect to their indirect interests in PFICs 
held through those entities; foreign entities may not make the section 
1295 election.
    Partnerships, S corporations, trusts, and estates are referred to 
as pass through entities in the temporary regulations. The regulations 
clarify that an election made by a domestic pass through entity is made 
in the pass through entity's capacity as a shareholder, as specially 
defined in temporary regulation Sec. 1.1295-1T(j) for purposes of the 
section 1295 election provisions. Thus, the domestic pass through 
entity takes the section 1293 inclusion into account in its return for 
the year in which or with which the PFIC's taxable year ends, and the 
interest holders in the pass through entity take the section 1293 
inclusion into account under the rules applicable to inclusions of 
income from the pass through entity. In addition, the temporary 
regulations clarify that if an interest holder in a domestic pass 
through entity transfers stock of a PFIC subject to a section 1295 
election to the pass through entity, the section 1295 election 
continues to apply to the interest holder whether or not the pass 
through entity makes the section 1295 election.
    Similarly, the temporary regulations clarify the effect of the 
termination under section 708(b) of a partnership on a section 1295 
election made by the partnership. Section 1.1295-1T(b)(3)(iii) provides 
that, notwithstanding the termination of section 1295 election when a 
partnership terminates, the partners of the former partnership that are 
partners of the new partnership are bound by the section 1295 election 
made by the former partnership whether or not the new partnership makes 
a section 1295 election.
    Notice 88-125 does not provide any special rules concerning tax-
exempt entities. As provided in proposed regulations under section 1291 
(see Regulation Project INTL-656-87, published at 1992-1 C.B. 1124), 
section 1291 and the regulations under section 1291 apply to a tax-
exempt organization that is a shareholder of a PFIC that is not a 
pedigreed QEF, within the meaning of Sec. 1.1291-9(j)(2)(ii), only if a 
dividend from the PFIC would be taxable to the organization under 
subchapter F. Section 1.1291-1T(e) of these temporary regulations 
provides the same rule. To prevent such a tax-exempt organization from 
being subject to an unnecessary section 1295 election that may have 
adverse consequences to the tax-exempt entity (e.g., an excise tax on 
gross investment income of a private foundation that arises as a 
consequence of a section 1295 election), the temporary regulations 
provide a rule that precludes a tax-exempt entity that is not taxable 
with respect to dividends from a PFIC from making a section 1295 
election with respect to that PFIC or from being subject to a pass 
through entity level election.
    Commenters indicated that Notice 88-125 is unclear about which 
taxable year of the PFIC is the first taxable year to which the section 
1295 election applies. Temporary regulation Sec. 1.1295-1T(c)(2) 
clarifies that the section 1295 election is effective with respect to 
the taxable year of the foreign corporation that ends during the 
shareholder's election year. Because certain shareholders may have 
misinterpreted Notice 88-125, the Commissioner will respect 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 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. For 
example, a calendar year shareholder that made the section 1295 
election in its 1995 return with respect to a foreign corporation whose 
taxable year began in 1995 and ended in 1996, with the intention that 
the election first apply to the foreign corporation's taxable year 
ended in 1996, will be treated as having made a valid section 1295 
election with respect to that year.

2. Additional Clarifications

A. Options
    Options with respect to PFIC stock present unique problems under 
section 1295. Section 1297(a)(4) provides that, under regulations, an 
option to acquire stock may be treated as ownership of stock.
    Proposed regulations under section 1291 (see Regulation Project 
INTL-656-87, published in 1992-1 C.B. 1124) provide that options are 
treated like stock for purposes of section 1291. Under proposed 
regulation Sec. 1.1291-1(d), an option is considered to be stock of a 
PFIC that is not a pedigreed QEF for purposes of applying section 1291 
to a disposition of the option, unless the holder of the actual stock 
which is subject to the option is currently including income from the 
stock under section 1293. Under proposed regulation Sec. 1.1291-
1(h)(3), the holding period of stock acquired upon exercise of an 
option treated as stock under Sec. 1.1291-1(d) includes the period the 
option was held. These rules recognize that the value of an option is 
linked to the value of the underlying stock and therefore such an 
option should be subject to the PFIC rules.
    Because of the potential for application of section 1291 to options 
or stock acquired upon exercise of options, some option holders have 
requested that regulations provide rules for making a section 1295 
election with respect to an option. Application of a section 1295 
election and the section 1293 current inclusion regime to options would 
present serious computational issues and would be administratively 
burdensome. Therefore, the temporary regulations continue the rule that 
any shareholder's section 1295 election with respect to stock of a PFIC 
does not apply to options to acquire stock of the PFIC and that an 
option holder may not make a section 1295 election with respect to the 
optioned stock. Accordingly, if a shareholder of stock subject to a 
section 1295 election exercises an option to purchase additional shares 
of stock of that PFIC, the stock received will be subject to the 
section 1295 election made by the shareholder, but, because of the 
rules of proposed regulation Sec. 1.1291-1(h)(3), the stock may be 
treated as stock of an unpedigreed QEF.
    Comments are requested concerning the option rule. In particular, 
comments are requested that identify any administratively feasible 
mechanisms that would permit a shareholder to make a section 1295 
election that will apply to options. B. Section 1295 Election Made in a Joint Return
    Section 1.1295-1T(b)(4) of the temporary regulations clarifies the 
application of a section 1295 election made in a joint return within 
the meaning of section 6013. The temporary regulations provide that a 
section 1295 election made in a joint return will be treated as having 
been made by both spouses that join in the filing of that return.
C. Lapse in PFIC Status or in Ownership
    Section 1.1295-1T(c)(2) of the temporary regulations clarifies the 
status of a shareholder's section 1295 election with respect to a 
foreign corporation after the foreign corporation ceases to be a PFIC 
and a QEF, or after the shareholder ceases to be a shareholder of the 
PFIC. In general, once a section 1295 election is made with respect to 
a corporation, it remains in effect, although not applicable, during 
those years that the foreign corporation is not a PFIC. Therefore, if 
the corporation requalifies as a PFIC, the section 1295 election 
previously made is still valid, and the shareholder is required to 
satisfy the requirements of that election. Furthermore, as indicated in 
H.R. No. 795, 100th Cong., 2d Sess., at 567 (1988), an election remains 
in effect with respect to a shareholder, although dormant, after a 
shareholder disposes of its entire interest in the PFIC. Upon the 
shareholder's reacquisition of a interest in the PFIC, the section 1295 
election will apply to the newly acquired stock.
D. Invalidation, Termination, and Revocation of Section 1295 Elections
    As provided in temporary regulation Sec. 1.1295-T(i)(1), the 
Commissioner has discretion to invalidate or terminate a section 1295 
election if the shareholder or the QEF fails to satisfy the section 
1295 election requirements. However, intentional failure to satisfy the 
section 1295 election requirements will not automatically result in 
invalidation or termination. If the Commissioner invalidates a section 
1295 election, the shareholder will be treated as if it never made a 
section 1295 election with respect to the PFIC. If the Commissioner 
terminates a section 1295 election for a taxable year, the section 1295 
election will be valid for all taxable years before that year, but 
inapplicable to that year and all subsequent taxable years.
    Once a shareholder makes a section 1295 election, the shareholder 
may revoke its section 1295 election only with the consent of the 
Commissioner. Temporary regulation Sec. 1.1295-1T(i)(2) provides the 
rules for requesting consent to revoke an election.
    The effects of an invalidation, termination, or revocation of a 
section 1295 are provided in Sec. 1.1295-1T(i)(3) of the temporary 
regulations. In the Commissioner's discretion, stock of a foreign 
corporation, with respect to which the section 1295 election is 
invalidated, terminated, or revoked will be treated as sold as of the 
last day of the PFIC's last taxable year as a QEF. The Commissioner 
also has the discretion to impose any other terms and conditions that 
the Commissioner deems necessary to ensure a shareholder's compliance 
with sections 1291 through 1297. In addition, revocation will terminate 
all section 1294 elections.
    Section 1.1295-1T(i)(4) of the temporary regulations permits a 
shareholder to make another section 1295 election with respect to the 
PFIC after the fifth taxable year following the invalidation, 
termination, or revocation. However, the shareholder may request 
consent to make the section 1295 election for an earlier taxable year.

3. Section 1293

    The temporary regulations provide guidance to PFICs concerning the 
application of section 1(h) to section 1293 and the calculation of net 
capital gain. Section 1.1293-1T(a)(2) of the temporary regulations 
provides three alternatives for a QEF to calculate and report net 
capital gain. First, the PFIC may calculate and report to its share-
holders the amount of each category of long-term capital gain provided 
in section 1(h). Alternatively, the PFIC may determine and report a 
single amount of net capital gain, stating that that amount of long-
term capital gain is subject to the highest capital gain rate of tax 
applicable to the shareholder. Under the third option, the PFIC may 
treat the total of its earnings and profits for the taxable year as 
ordinary earnings. The provision of these options is intended to 
simplify compliance with the requirements of sections 1293 and 1295. It 
is anticipated that, without providing these options, some PFICs would 
not be willing or able to calculate the categories of net capital gain 
required by section 1(h) and therefore would not provide the 
information necessary for a QEF shareholder to maintain a valid section 
1295 election. A shareholder that has access to information necessary 
to calculate its pro rata share of the PFIC's ordinary earnings and net 
capital gain may also use any of these options. The Service requests 
comments about how net capital gain should be calculated, especially in 
light of the 1997 Act changes to section 1.
    The temporary regulations under section 1293 also clarify the 
application of the current inclusion rules of section 1293 to interests 
in a QEF held through a domestic pass through entity. The temporary 
regulations provide generally that a U.S. person that is a shareholder 
of the QEF by reason of an interest in a domestic pass through entity 
takes into account its pro rata shares of the ordinary earnings and net 
capital gain of the QEF attributable to the QEF shares held by the pass 
through entity according to the general rules applicable to inclusions 
of income from the pass through entity.

4. Exempt organizations subject to section 1291

    As stated above, the temporary regulations include the rule of 
proposed regulation Sec. 1.1291-1(e). Under temporary regulation 
Sec. 1.1291-1T(e), if the shareholder of a PFIC is an organization 
exempt from tax under this chapter (including an Individual Retirement 
Account (IRA)), section 1291 and these regulations apply to such 
shareholder only if a dividend from the PFIC would be taxable to the 
organization under subchapter F.

5. Effective Dates of Temporary Regulations Secs. 1.1291-1T(e), 1.1293-
1T(a)(2), 1.1293-1T(c) and 1.1295-1T

    As stated above, Notice 88-125 provides that the notice's rules 
will be provided in regulations applicable to taxable years beginning 
after 1986. However, because the temporary regulations do not adopt the 
rules of Notice 88-125 in their entirety, the temporary regulations 
will not be retroactively applied. Therefore, Sec. 1.1295-1T(c) through 
(j) will apply to taxable years of shareholders beginning after 
December 31, 1997. As provided in Sec. 1.1295-1T(h), the Internal 
Revenue Service will honor taxpayer reliance on Notice 88-125 for 
taxable years beginning after December 31, 1986, and before January 1, 
1998. Thus, if a person made a valid section 1295 election under the 
rules of Notice 88-125 for taxable years beginning before January 1, 
1998, and, for those taxable years, complied with the rules of the 
notice relating to maintaining that election, the election remains in 
effect for taxable years beginning after December 31, 1997. However, 
elections made under Notice 88-125, as well as elections made under 
these temporary regulations, must be maintained as provided in the 
temporary regulations.
    Temporary regulation Sec. 1.1291-1T(e) will apply on and after 
April 1, 1992. Section 1.1293-1T(a)(2) of the temporary regulations will apply to 
sales by QEFs during their taxable years ending on or after May 7, 
1997. Temporary regulation Secs. 1.1293-1T(c) and 1.1295-1T(b)(2)(iii), 
(b)(3), and (b)(4) will apply to taxable years of shareholders 
beginning after December 31, 1997.

6. Retroactive Section 1295 Elections

a. In General
    Section 1295(b)(2) provides that, to the extent provided in 
regulations, a shareholder may make a section 1295 election with 
respect to a foreign corporation later than the election due date if 
the shareholder failed to make a timely section 1295 election because 
the shareholder reasonably believed that the foreign corporation was 
not a PFIC. In temporary regulation Sec. 1.1295-3T, Treasury and the 
Service interpret section 1295(b)(2) to permit a shareholder of a PFIC 
to make a retroactive election in certain limited circumstances where 
the shareholder possessed reasonable belief that the corporation was 
not a PFIC or the shareholder demonstrates that it reasonably relied on 
the advice of a qualified tax professional.
    As described below, the temporary regulations set forth two 
distinct sets of rules for making a retroactive election. Under the 
first set of rules, a shareholder of a PFIC that meets certain 
conditions may make a retroactive election without obtaining the 
consent of the Commissioner (protective regime). A shareholder may make 
a retroactive election under the protective regime only if the 
shareholder possessed reasonable belief as of the election due date 
that the foreign corporation was not a PFIC. A shareholder of a PFIC 
may make a retroactive election under the protective regime even after 
the issue of PFIC status has been raised in an audit by the Service.
    Under the second set of rules, a shareholder may make a retroactive 
election only after obtaining the Commissioner's consent (consent 
regime). To make a retroactive election under the consent regime, the 
shareholder must demonstrate, to the satisfaction of the Commissioner, 
that the shareholder's failure to make a timely section 1295 election 
resulted from the shareholder's reasonable reliance on the advice of a 
qualified tax professional. A shareholder of a PFIC may not make a 
retroactive election under the consent regime unless the shareholder 
files a request for consent before the issue of PFIC status is raised 
on audit.
    The temporary regulations provide the exclusive rules for making a 
retroactive election. Thus, a shareholder that does not satisfy the 
requirements of the temporary regulations may not seek relief under any 
other provision of the law, including Sec. 301.9100 regulations. 
Although such a shareholder may not make a retroactive election, the 
shareholder may be able to attain certain benefits associated with a 
retroactive election by making a section 1295 election for the current 
year together with a purging election under section 1291(d)(2).
b. Protective Regime
    A shareholder that satisfies the requirements of the protective 
regime may make a retroactive election under the rules of temporary 
regulation Sec. 1.1295-3T(c) through (e) without obtaining the 
Commissioner's consent. This regime requires that the shareholder 
possess reasonable belief, contemporaneous with the election due date, 
that the foreign corporation was not a PFIC.
    The legislative history of section 1295 suggests that in certain 
circumstances a shareholder that reasonably believed that a foreign 
corporation was not a PFIC for a taxable year (e.g., based on a 
reasonable valuation of the corporation's assets) may make a 
retroactive election if the Service determines, upon examination, that 
the corporation was in fact a PFIC for such taxable year (e.g., based 
on the Service's valuation of the corporation's assets for the taxable 
year). Consistent with the legislative history, temporary regulation 
Sec. 1.1295-3T(c) through (e) permits a shareholder to make a 
retroactive election for a taxable year of the shareholder (retroactive 
election year), even if the Service raises the PFIC status of the 
corporation upon audit. Although the shareholder need not request the 
Service's consent to make a retroactive election under this regime, the 
shareholder must satisfy certain conditions to make a retroactive 
election.
    First, except for certain small shareholders, the shareholder must 
be able to establish that the shareholder reasonably believed, within 
the meaning of temporary regulation Sec. 1.1295-3T(d), as of the 
election due date, that the foreign corporation was not a PFIC. 
Temporary regulation Sec. 1.1295-3T(d) interprets the reasonable belief 
standard to require an actual determination by the shareholder, based 
on a good faith application of the law, that a foreign corporation was 
not a PFIC. Therefore, to satisfy the reasonable belief requirement, 
the shareholder must know and understand the PFIC provisions, and must 
make a good faith effort to apply the income and asset tests of section 
1296 to determine whether the foreign corporation is a PFIC.
    Except for certain small shareholders, a shareholder must file a 
single Protective Statement pursuant to temporary regulation 
Sec. 1.1295-3T(c) that applies to a taxable year to preserve the 
shareholder's ability to make a retroactive election with respect to 
such taxable year of the shareholder and subsequent taxable years. The 
Protective Statement must contain information describing the basis for 
the shareholder's conclusion as of the election due date that the 
foreign corporation was not a PFIC for its taxable year that ended in 
the first taxable year of the shareholder for which the Protective 
Statement applies. As part of the Protective Statement, the shareholder 
must extend the periods of limitations for the assessment of taxes 
determined under sections 1291 through 1297 (PFIC related taxes) for 
all taxable years to which the Protective Statement will apply, as 
provided in Sec. 1.1295-3T(c)(4) of the temporary regulations. The 
shareholder also must include certain additional information in the 
Protective Statement. A special transition rule permits shareholders to 
use the protective regime for taxable years ending prior to January 2, 
1998 provided the periods of limitations on the assessment of taxes for 
such years have not expired.
    Temporary regulation Sec. 1.1295-3T(e) provides special rules for 
certain small shareholders. A shareholder that qualifies under 
Sec. 1.1295-3T(e) for a taxable year will not be required to satisfy 
the reasonable belief requirement or file a Protective Statement to 
preserve the shareholder's ability to make a retroactive election with 
respect to such year (a qualified shareholder).
    Except as provided below, a shareholder is a qualified shareholder 
only if the shareholder owns, directly, indirectly or constructively, 
less than two percent of the vote and value of each class of stock of 
the foreign corporation during such year, and has not filed a 
Protective Statement that applies to an earlier year included in the 
shareholder's holding period of stock of the foreign corporation. In 
addition, for the special rule to apply to a taxable year of the 
shareholder, the foreign corporation or its U.S. counsel must have 
indicated in a corporate filing, shareholder mailing or similar 
document that the foreign corporation reasonably believed that it was 
not a PFIC for the taxable year of the foreign corporation that ended with or within such taxable year of the 
shareholder. However, no shareholder will be a qualified shareholder if 
the shareholder knew that the corporation was in fact a PFIC or knew or 
had reason to know that a corporate filing relating to the 
corporation's PFIC status was inaccurate. For this purpose, a 
shareholder will be treated as knowing that the corporation was in fact 
a PFIC if the principal activity of the foreign corporation is owning 
or trading a diversified portfolio of stock, securities, or other 
financial contracts. A qualified shareholder that makes a valid 
retroactive election in its earliest open taxable year in which the 
foreign corporation is a PFIC may, subject to certain conditions, be 
treated as a shareholder of a pedigreed QEF even if the period of 
limitations for the assessment of taxes for an earlier taxable year in 
which the corporation qualified as a PFIC has expired.
c. Consent Regime
    Certain taxpayers have urged the Service to interpret the 
reasonable belief requirement of section 1295(b)(2) to allow a 
shareholder to make a retroactive election if the shareholder or its 
tax adviser did not know or properly apply the PFIC rules. In 
particular, certain taxpayers have recommended adoption of the 
reasonable action and good faith standard of Sec. 301.9100 regulations 
for demonstrating reasonable belief.
    Treasury and the Service recognize that the PFIC rules are complex 
and, in some cases, difficult for shareholders to apply. Accordingly, 
the temporary regulations provide that, in certain limited 
circumstances, a shareholder may obtain the Commissioner's consent to 
make a retroactive election, even if the shareholder failed to know or 
properly apply the PFIC rules in the earlier year. Under temporary 
regulation Sec. 1.1295-3T(f), a shareholder that reasonably relied on 
the advice of a qualified tax professional may request consent to make 
a retroactive election.
    In response to taxpayer comments, Treasury and the Service have 
incorporated into the consent regime certain rules set forth in 
Sec. 301.9100 regulations. As described below, temporary regulation 
Sec. 1.1295-3T(f)(1) and (4), respectively, require the shareholder to 
have reasonably relied on a qualified tax professional and to document 
such reliance. The Service will not grant consent under this regime if 
doing so would prejudice the interests of the government by placing the 
shareholder in a position more favorable then if the shareholder had 
made the section 1295 election on a timely basis. The temporary 
regulations provide that in certain cases the interests of the 
government may be preserved by a closing agreement between the Service 
and the shareholder requiring the shareholder to make a payment to the 
government that compensates the government for amounts that would have 
been due in respect of closed years affected by the retroactive 
election.
    Under temporary regulation Sec. 1.1295-3T(f)(2), the Service will 
treat a shareholder as having reasonably relied on a qualified tax 
professional (including an employee of the shareholder), within the 
meaning of the Sec. 301.9100 regulations, if the qualified tax 
professional failed to identify the corporation as a PFIC or failed to 
advise the shareholder of the consequences of making, or failing to 
make, a section 1295 election. Therefore, if a qualified tax 
professional, due to ignorance of the law or negligence, failed to 
identify the corporation as a PFIC or failed to advise the shareholder 
of the consequences of making, or failing to make, the section 1295 
election, the Commissioner may consent to a retroactive election. 
However, in no event will the Commissioner consent to a retroactive 
election if, prior to the application for such consent, the Service has 
raised the PFIC status of the foreign corporation in an audit of the 
retroactive election year or any subsequent year. Furthermore, a 
shareholder may not disregard knowledge that the corporation was a PFIC 
or advice or knowledge relating to the tax consequences of owning stock 
of a PFIC and then request relief under this regime.
d. Who Makes a Retroactive Election and Who Satisfies the Requirements 
of the Protective or Consent Regime
    Temporary regulation Sec. 1.1295-3T adopts the rules of temporary 
regulation Sec. 1.1295-1T(d), relating to who may make a section 1295 
election, for purposes of determining the appropriate person to satisfy 
the requirements of the protective or consent regime and to make a 
retroactive election. Consistent with these rules, temporary regulation 
Sec. 1.1295-3T(c)(3) provides that the person that executes and files 
the Protective Statement under the protective regime is the person that 
makes the section 1295 election, as provided in Sec. 1.1295-1T(d). 
Temporary regulation Sec. 1.1295-3T(f)(4)(vi) sets forth a similar rule 
for requests for consent under the consent regime. In addition, 
temporary regulation Sec. 1.1295-3T(g)(3) provides for an entity-level 
retroactive election in the case of domestic partnerships, S 
corporations, domestic nongrantor trusts, and domestic estates that own 
stock of a PFIC, and a partner or beneficiary-level retroactive 
election in the case of foreign partnerships, foreign trusts, domestic 
grantor trusts, and foreign estates that own stock of a PFIC.
    The Service welcomes comments concerning the benefits of requiring 
certain entities, rather than their interest holders, to satisfy the 
requirements under the protective and consent regimes. In particular, 
comments are requested concerning whether requiring S corporations, 
domestic nongrantor trusts, and domestic estates to satisfy the 
requirements of the protective regime at the entity-level is 
inappropriate.
e. Making a Retroactive Election
    A shareholder that has satisfied the requirements of the protective 
regime or has obtained the consent of the Commissioner under the 
consent regime must comply with the rules in temporary regulation 
Sec. 1.1295-3T(g) for making a retroactive election. In general, the 
shareholder must file an amended return for the retroactive election 
year in which the shareholder complies with the requirements for making 
a section 1295 election, report its pro rata shares of the ordinary 
earnings and net capital gain of the foreign corporation for that year 
(section 1293 inclusion), if any, and pay any taxes resulting from the 
redetermination of its income and any applicable section 6621 interest. 
The shareholder also must file amended returns for the taxable years 
that follow the retroactive election year in which the foreign 
corporation is a PFIC and a QEF to report the section 1293 inclusion 
for each of these years, and pay the resulting tax and section 6621 
interest. If the shareholder's taxable year in which the corporation 
first qualified as a PFIC, or the retroactive election year or any 
subsequent taxable years, are closed for the assessment of PFIC related 
taxes (i.e., in certain cases where the shareholder is a qualified 
shareholder or the shareholder has obtained the consent of the 
Commissioner to file a retroactive election), the shareholder must file 
amended returns to report section 1293 inclusions in all open affected 
years beginning with the first taxable year open for the assessment of 
tax on such amounts.

7. Removal of Sec. 1.1291-9(i)(1)

    Section 1121 of the 1997 TRA amends section 1296, adding section 
1296(e). Section 1296(e) provides that after December 31, 1997, a 
controlled foreign corporation (as defined in section 957(a)) (CFC) will not be treated as a PFIC with respect to a U.S. 
shareholder (as defined in section 951(b)) of the CFC. After a 
shareholder ceases to qualify for this exception, because the 
shareholder creases to be subject to subpart F, generally the 
shareholder will have a new holding period for purposes of the PFIC 
provisions pursuant to section 1296(e)(3)(A). However, pursuant to 
section 1296(e)(3)(B), if the foreign corporation was a nonqualified 
fund before the shareholder qualified for this exception, and the 
shareholder did not make the section 1297(b)(1) election to purge the 
stock of its PFIC taint, the shareholder will not get a new holding 
period when it ceases to qualify for the exception for U.S. 
shareholders of CFCs. Congress, in the Conference Report to the 1997 
TRA, H.R. Rept. 105-220, 105th Congress, 1st session, at 625, stated 
that ``the stock held by such shareholder continues to be treated as 
PFIC stock unless the shareholder makes an election to pay tax and an 
interest charge with respect to the unrealized appreciation in the 
stock or the accumulated earnings of the corporation.'' Congress thus 
indicated its intent that a shareholder may apply the rules of either 
section 1291(d)(2)(A), the deemed sale election, or section 
1291(d)(2)(B), the deemed dividend election, when making the section 
1297(b)(1) election to purge a former PFIC of its PFIC taint. In order 
to give effect to that intent, Treasury and the IRS have decided to 
remove Sec. 1.1291-9(i)(1), which provides that the rules of 
Sec. 1.1291-9, the deemed dividend election, do not apply to an 
election under section 1297(b)(1). The removal of Sec. 1.1291-9(i)(1) 
is effective as of January 2, 1998. Section 1.1291-9(i)(2) is not 
affected by the removal of Sec. 1.1291-9(i)(1).

8. Section 1297

    The temporary regulations amend Sec. 1.1297-3T to provide that a 
shareholder of a former PFIC, within the meaning of Sec. 1.1291-
9(j)(2)(iv), that was a CFC during its last taxable year as a PFIC 
under section 1296(a), may apply the rules of the deemed dividend 
election under section 1291(d)(2)(B) and Sec. 1.1291-9 to its section 
1297(b)(1) election made by the time and in the manner provided in 
Sec. 1.1297-3T(b). If the time for making a section 1297(b)(1) 
election, provided in Sec. 1.1297-3T(b), expired before January 2, 
1998, a shareholder that applied the rules of section 1291(d)(2)(A) and 
Sec. 1.1291-10 to a section 1297(b)(1) election, made with respect to a 
former PFIC that was a CFC in its last taxable year as a PFIC under 
section 1296(a), may file an amended return for its taxable year that 
includes the termination date, as defined in Sec. 1.1297-3T(a), and 
apply the rules of the deemed dividend election to its section 
1297(b)(1) election at any time before the expiration of the period of 
limitations for the assessment of taxes for that taxable year. Section 
1.1297-3T(c) is effective as of January 2, 1998.

Special Analyses

    It has been determined that this Treasury Decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. Pursuant to section 
7805(f) of the Internal Revenue Code, these temporary regulations will 
be submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business. An 
initial regulatory flexibility analysis has been prepared for the 
proposed regulations for which these temporary regulations serve as a 
text and which is set forth in the notice of proposed rulemaking on 
this subject in the Proposed Rules section of this issue of the Federal 
Register.

Drafting Information

    The principal authors of these regulations are Gayle Novig and 
Judith Cavell Cohen, of the Office of the Associate Chief Counsel 
(International). Other personnel from the IRS and Treasury Department 
also participated in the development of these regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
the following entries, in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.1291-1T also issued under 26 U.S.C. 1291.* * *
    Section 1.1293-1T also issued under 26 U.S.C. 1293.* * *
    Section 1.1295-1T also issued under 26 U.S.C. 1295(b).
    Section 1.1295-3T also issued under 26 U.S.C. 1295(b).* * *


Sec. 1.1291-0  [Amended]

    Par. 2. Section 1.1291-0 is amended by removing and reserving the 
entry for Sec. 1.1291-9(i)(1).
    Par. 3. The section heading and introductory text for Sec. 1.1294-0 
are added to read as follows:


Sec. 1.1294-0  Table of contents.

    This section contains a listing of the headings for Sec. 1.1294-1T.
    Par. 4. The section heading and introductory text for Sec. 1.1297-0 
are added to read as follows:


Sec. 1.1297-0  Table of contents.

    This section contains a listing of the headings for Sec. 1.1297-3T.


Sec. 1.1291-0T  [Amended]

    Par. 5. Section 1.1291-0T is amended by:
    1. Transferring the listing of the section heading and entries for 
Sec. 1.1294-1T to new Sec. 1.1294-0.
    2. Transferring the listing of the section heading and entries for 
Sec. 1.1297-3T to new Sec. 1.1297-0.
    3. Removing the section heading and introductory text.
    Par. 6. Section 1.1291-1T is added to read as follows:


Sec. 1.1291-1T  Taxation of U.S. persons that are shareholders of PFICs 
that are not pedigreed QEFs (temporary).

    (a) through (d) [Reserved].
    (e) Exempt organization as shareholder--(1) In general. If the 
shareholder of a PFIC is an organization exempt from tax under this 
chapter, section 1291 and these regulations apply to such shareholder 
only if a dividend from the PFIC would be taxable to the organization 
under subchapter F.
    (2) Effective date. Paragraph (e)(1) of this section is applicable 
on and after April 1, 1992.


Sec. 1.1291-9  [Amended]

    Par. 7. Section 1.1291-9 is amended by removing and reserving 
paragraph (i)(1).
    Par. 8. Section 1.1293-0 is added to read as follows.


Sec. 1.1293-0  Table of contents.

    This section contains a listing of the headings for Sec. 1.1293-1T.

Sec. 1.1293-1T  Current inclusion of income of qualified electing 
funds (temporary).

    (a) In general. [Reserved].
    (1) Other rules. [Reserved].
    (2) Net capital gain defined.
    (i) In general.
    (ii) Effective date.
    (b) Other rules [Reserved].
    (c) Application of rules of inclusion with respect to stock held 
by a pass through entity. (1) In general.
    (2) QEF stock transferred to a pass through entity.
    (i) Pass through entity makes a section 1295 election.
    (ii) Pass through entity does not make a section 1295 election.
    (3) Effective date.

    Par. 9. Section 1.1293-1T is added to read as follows:


Sec. 1.1293-1T  Current taxation of income from qualified electing 
funds (temporary).

    (a) In general. [Reserved].
    (1) Other rules. [Reserved].
    (2) Net capital gain defined--(i) In general. This paragraph (a)(2) 
defines the term net capital gain for purposes of sections 1293 and 
1295 and the regulations under those sections. The QEF, as defined in 
Sec. 1.1291-9(j)(2)(i), in determining its net capital gain for a 
taxable year, may either--
    (A) Calculate and report the amount of each category of long-term 
capital gain provided in section 1(h) that was recognized by the PFIC 
in the taxable year;
    (B) Calculate and report the amount of net capital gain recognized 
by the PFIC in the taxable year, stating that that amount is subject to 
the highest capital gain rate of tax applicable to the shareholder; or
    (C) Calculate its earnings and profits for the taxable year and 
report the entire amount as ordinary earnings.
    (ii) Effective date. Paragraph (a)(2)(i) of this section is 
applicable to sales by QEFs during their taxable years ending on or 
after May 7, 1997.
    (b) Other rules. [Reserved].
    (c) Application of rules of inclusion with respect to stock held by 
a pass through entity--(1) In general. A domestic pass through entity 
takes into account its pro rata shares of the ordinary earnings and net 
capital gain attributable to the QEF shares held by the pass through 
entity. A U.S. person that indirectly owns QEF shares through the 
domestic pass through entity accounts for its pro rata shares of 
ordinary earnings and net capital gain attributable to the QEF shares 
according to the general rules applicable to inclusions of income from 
the domestic pass through entity. For the definition of pass through 
entity, see Sec. 1.1295-1T(j).
    (2) QEF stock transferred to a pass through entity--(i) Pass 
through entity makes a section 1295 election. If a shareholder 
transfers stock subject to a section 1295 election to a domestic pass 
through entity of which it is an interest holder and the pass through 
entity makes a section 1295 election with respect to that stock, as 
provided in Sec. 1.1295-1T(D)(2), the shareholder takes into account 
its pro rata shares of the ordinary earnings and net capital gain 
attributable to the QEF shares under the rules applicable to inclusions 
of income from the pass through entity.
    (ii) Pass through entity does not make a section 1295 election. If 
the pass through entity does not make a section 1295 election with 
respect to the PFIC, the shares of which were transferred to the pass 
through entity subject to the 1295 election of the shareholder, the 
shareholder continues to be subject, in its capacity as an indirect 
shareholder, to the income inclusion rules of section 1293 and 
reporting rules required of shareholders of QEFs. Proper adjustments to 
reflect an inclusion in income under section 1293 by the indirect 
shareholder must be made, under the principles of Sec. 1.1291-9(f), to 
the basis of the indirect shareholder's interest in the pass through 
entity.
    (3) Effective date. Paragraph (c) of this section is applicable to 
taxable years of shareholders beginning after December 31, 1997.
    Par. 10. Section 1.1295-0 is added to read as follows:


Sec. 1.1295-0  Table of contents.

    This section contains a listing of the headings for Secs. 1.1295-1T 
and 1.1295-3T.

Sec. 1.1295-1T  Qualified electing funds (temporary).

    (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.
    (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.
    (ii) Limitation on application of pass through entity's section 
1295 election.
    (iii) Effect of partnership termination on section 1295 
election.
    (iv) Characterization of stock held through a pass through 
entity.
    (4) Application of general rules to a taxpayer filing a joint 
return under section 6013.
    (c) Effect of section 1295 election.
    (1) In general.
    (2) Years to which section 1295 election applies.
    (i) In general.
    (ii) Effect of PFIC status on election.
    (iii) Effect on election of complete termination of a 
shareholder's interest in the PFIC.
    (iv) Effect on section 1295 election of transfer of stock to a 
domestic pass through entity.
    (v) Examples.
    (d) Who may make a section 1295 election.
    (1) General rule.
    (2) Application of general rule to pass through entities.
    (i) Partnerships.
    (A) Domestic partnership.
    (B) Foreign partnership.
    (ii) S corporation.
    (iii) Trust or estate.
    (A) Domestic trust or estate.
    (1) Nongrantor trust or estate.
    (2) Grantor trust.
    (B) Foreign trust or estate.
    (1) Nongrantor trust or estate.
    (2) Grantor trust.
    (iv) Indirect ownership of the pass through entity or the PFIC.
    (3) Member of consolidated return group as shareholder.
    (4) Option holder.
    (5) Exempt organization.
    (e) Time for making a section 1295 election.
    (f) Manner of making a section 1295 election and the annual 
election requirements of the shareholder.
    (1) Manner of making the election.
    (2) Annual election requirements.
    (i) In general.
    (ii) Retention of documents.
    (g) Annual election requirements of the PFIC or intermediary.
    (1) PFIC Annual Information Statement.
    (2) Alternative documentation.
    (3) Annual Intermediary Statement.
    (4) Combined statements.
    (i) PFIC Annual Information Statement.
    (ii) Annual Intermediary Statement.
    (h) Transition rules.
    (i) Invalidation, termination or revocation of section 1295 
election.
    (1) Invalidation or termination of election at the discretion of 
the Commissioner.
    (i) In general.
    (ii) Deferral of section 1293 inclusion.
    (iii) When effective.
    (2) Shareholder revocation.
    (i) In general.
    (ii) Time for and manner of requesting consent to revoke.
    (A) Time.
    (B) Manner of making request.
    (iii) When effective.
    (3) Effect of invalidation, termination, or revocation.
    (4) Election after invalidation, termination, or revocation.
    (j) Definitions.
    (k) Effective date.


Sec. 1.1295-3T  Retroactive elections (temporary).

    (a) In general.
    (b) General rule.
    (c) Protective Statement.
    (1) In general.
    (2) Reasonable belief statement.
    (3) Who executes and files the Protective Statement.
    (4) Waiver of the periods of limitations.
    (i) Time for and manner of extending periods of limitations.
    (A) In general.
    (B) Application of general rule to domestic partnerships. (1) In general
    (2) Special rules.
    (i) Addition of partner to non-TEFRA partnership.
    (ii) Change in status from non-TEFRA partnership to TEFRA 
partnership.
    (C) Application of general rule to domestic nongrantor trusts 
and domestic estates.
    (D) Application of general rule to S corporations.
    (E) Effect on waiver of complete termination of a pass through 
entity or pass through entity's business.
    (F) Application of general rule to foreign partnerships, foreign 
trusts, domestic or foreign grantor trusts, and foreign estates.
    (ii) Terms of waiver.
    (A) Scope of waiver.
    (B) Period of waiver.
    (5) Time for and manner of filing a Protective Statement.
    (i) In general.
    (ii) Special rule for taxable years ended before January 2, 1998
    (6) Applicability of the Protective Statement.
    (i) In general.
    (ii) Invalidity of the Protective Statement.
    (7) Retention of Protective Statement and information 
demonstrating reasonable belief.
    (d) Reasonable belief.
    (1) In general.
    (2) Knowledge of law required.
    (e) Special rules for qualified shareholders.
    (1) In general.
    (2) Qualified shareholder.
    (3) Exceptions.
    (f) Special consent.
    (1) In general.
    (2) Reasonable reliance on a qualified tax professional.
    (i) In general.
    (ii) Shareholder deemed to have not reasonably relied on a 
qualified tax professional.
    (3) Prejudice to the interests of the United States government.
    (i) General rule.
    (ii) Elimination of prejudice to the interests of the United 
States government.
    (4) Procedural requirements.
    (i) Filing instructions.
    (ii) Affidavit from shareholder.
    (iii) Affidavits from other persons.
    (iv) Other information.
    (v) Notification of Internal Revenue Service.
    (vi) Who requests special consent under this paragraph (f) and 
who enters into a closing agreement.
    (g) Time for and manner of making a retroactive election.
    (1) Time for making a retroactive election.
    (i) In general.
    (ii) Transition rule.
    (iii) Ownership not required at time retroactive election is 
made.
    (2) Manner of making a retroactive election.
    (3) Who makes the retroactive election.
    (4) Other elections.
    (i) Section 1291(d)(2) election.
    (ii) Section 1294 election.
    (h) Effective date.

    Par. 11. Section 1.1295-1T is added to read as follows:


Sec. 1.1295-1T  Qualified electing funds (temporary).

    (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 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 s