Proposed Rule2022-00067
Guidance on Passive Foreign Investment Companies and Controlled Foreign Corporations Held by Domestic Partnerships and S Corporations and Related Person Insurance Income
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 25, 2022
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding the treatment of domestic partnerships and S corporations that own stock of passive foreign investment companies ("PFICs") and their domestic partners and shareholders (the "proposed regulations"). The proposed regulations also provide guidance regarding the determination of the controlling domestic shareholders of foreign corporations, the owner of a controlled foreign corporation ("CFC") or qualified electing fund ("QEF") that makes an election under section 1411, the treatment of S corporations with accumulated earnings and profits under subpart F of part III of subchapter N of chapter 1 of the Internal Revenue Code ("subpart F" of the "Code"), and the determination and inclusion of related person insurance income ("RPII") under section 953(c). The proposed regulations affect United States persons that own, directly or indirectly, stock in certain foreign corporations.
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 16 (Tuesday, January 25, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 16 (Tuesday, January 25, 2022)]
[Proposed Rules]
[Pages 3890-3919]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-00067]
[[Page 3889]]
Vol. 87
Tuesday,
No. 16
January 25, 2022
Part II
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Part 1
Guidance on Passive Foreign Investment Companies and Controlled Foreign
Corporations Held by Domestic Partnerships and S Corporations and
Related Person Insurance Income; Proposed Rule
Federal Register / Vol. 87 , No. 16 / Tuesday, January 25, 2022 /
Proposed Rules
[[Page 3890]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-118250-20]
RIN 1545-BP94
Guidance on Passive Foreign Investment Companies and Controlled
Foreign Corporations Held by Domestic Partnerships and S Corporations
and Related Person Insurance Income
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and partial withdrawal of notice
of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations regarding the
treatment of domestic partnerships and S corporations that own stock of
passive foreign investment companies (``PFICs'') and their domestic
partners and shareholders (the ``proposed regulations''). The proposed
regulations also provide guidance regarding the determination of the
controlling domestic shareholders of foreign corporations, the owner of
a controlled foreign corporation (``CFC'') or qualified electing fund
(``QEF'') that makes an election under section 1411, the treatment of S
corporations with accumulated earnings and profits under subpart F of
part III of subchapter N of chapter 1 of the Internal Revenue Code
(``subpart F'' of the ``Code''), and the determination and inclusion of
related person insurance income (``RPII'') under section 953(c). The
proposed regulations affect United States persons that own, directly or
indirectly, stock in certain foreign corporations.
DATES: Written or electronic comments and requests for a public hearing
must be received by April 25, 2022. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-118250-
20) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (``Treasury
Department'') and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable on
paper, to its public docket. Send hard copy submissions to:
CC:PA:LPD:PR (REG-118250-20), Room 5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under Sec. Sec. 1.958-1(d), 1.964-1, 1.1291-1, 1.1291-9, 1.1293-1,
1.1295-1, 1.1296-1, 1.1297-0, 1.1297-3, 1.1298-1, 1.1298-3, and 1.1411-
10, Edward Tracy at (202) 317-6934; concerning proposed regulation
Sec. 1.958-1(e), Jennifer N. Keeney at (202) 317-5045; concerning
proposed regulation Sec. 1.953-3, Raphael Cohen at (202) 317-3756 or
Josephine Firehock at (202) 317-6938; concerning submissions of
comments or requests for a public hearing, Regina Johnson at (202) 317-
5177 (not toll free numbers).
SUPPLEMENTARY INFORMATION:
Background
I. Regulations Addressing the Treatment of Domestic Partnerships for
Purposes of Sections 951(a) and 951A
On October 10, 2018, the Treasury Department and the IRS published
in the Federal Register proposed regulations under section 951A (REG-
104390-18, 83 FR 51072) (``2018 proposed regulations''). The 2018
proposed regulations provided a hybrid approach to the treatment of a
domestic partnership that is a United States shareholder, as defined in
section 951(b) (``U.S. shareholder''), with respect to a CFC (``U.S.
shareholder partnership''). Under the hybrid approach, a U.S.
shareholder partnership would determine its section 951A inclusion, and
the partners of the partnership that were not also U.S. shareholders of
the CFC (``non-U.S. shareholder partners'') would take into account
their distributive share of the inclusion. See proposed Sec. 1.951A-
5(b), 83 FR 51072, 51101. Partners that were themselves U.S.
shareholders of a CFC (``U.S. shareholder partners'') would not take
into account their distributive share of the partnership's global
intangible low-taxed income (``GILTI'') inclusion amount and instead
would be treated as proportionately owning the stock of the CFC within
the meaning of section 958(a) as if the domestic partnership were a
foreign partnership. See proposed Sec. 1.951A-5(c), 83 FR 51072,
51101-51102.
On June 21, 2019, the Treasury Department and the IRS published
final regulations (TD 9866) in the Federal Register (84 FR 29288, as
corrected at 84 FR 44223, 84 FR 44693, and 84 FR 53052) under sections
951, 951A, 1502, and 6038 that include guidance with respect to the
treatment of domestic partnerships that own stock in CFCs for purposes
of section 951A (the ``final section 951A regulations''). The final
section 951A regulations did not adopt the hybrid approach set forth in
the 2018 proposed regulations and instead generally treat a domestic
partnership as an aggregate of all of its partners for purposes of
computing income inclusions under section 951A (and other provisions
that apply by reference to section 951A). The final section 951A
regulations apply to taxable years of foreign corporations beginning
after December 31, 2017, and to taxable years of U.S. shareholders in
which or with which such taxable years of foreign corporations end.
Sec. 1.951A-7. On the same date, the Treasury Department and the IRS
published proposed regulations (REG-101828-19) in the Federal Register
(84 FR 29114) that extended this aggregate treatment of domestic
partnerships for purposes of computing subpart F inclusions under
section 951 (the ``2019 proposed regulations'').
In the preamble to the 2019 proposed regulations, the Treasury
Department and the IRS requested comments on the application of
sections 1291 and 1293 through 1298 of the Code (the ``PFIC regime'')
to domestic partnerships that directly or indirectly own PFIC stock and
their domestic partners, including the operation of the PFIC regime
with respect to non-U.S. shareholder partners of domestic partnerships
under section 1297(d). 84 FR 29120. The 2019 proposed regulations are
issued, with modifications, as final regulations in the Rules and
Regulations section of this issue of the Federal Register (the ``final
regulations'').
On August 22, 2019, the Treasury Department and the IRS released
Notice 2019-46, 2019-37 I.R.B. 695, announcing the intention to issue
regulations that will permit a domestic partnership or S corporation to
apply the hybrid approach set forth in proposed Sec. 1.951A-5 for
taxable years ending before June 22, 2019 (that is, the hybrid approach
set forth in the 2018 proposed regulations, which was revised in the
2019 final section 951A regulations to reflect an aggregate approach
for purposes of section 951A). The notice also addressed the
applicability of penalties in the case of a domestic partnership or S
corporation that consistently applied proposed
[[Page 3891]]
Sec. 1.951A-5 on or before June 21, 2019, but filed a tax return
consistent with the final section 951A regulations under Sec. 1.951A-
1(e). The notice was issued to address the compliance burden, and
related penalty exposure, of domestic partnerships and S corporations
that filed returns based on the hybrid approach set forth in the 2018
proposed regulations for taxable years ending before June 22, 2019, but
later became subject to the aggregate approach of Sec. 1.951A-1(e) for
those years.
II. Treatment of Domestic Partnerships as Entities or Aggregates of
their Partners--In General
For purposes of applying a particular provision of the Code, a
partnership may be treated as either an entity separate from its
partners or as an aggregate of its partners. Under the aggregate
approach, the partners of a partnership, and not the partnership, are
treated as owning the partnership's assets and conducting the
partnership's operations. Under the entity approach, the partnership is
respected as separate and distinct from its partners, and therefore the
partnership, and not the partners, is treated as owning the
partnership's assets and conducting the partnership's operations.
Whether the aggregate or entity approach applies depends on which
approach is more appropriate to carry out the scope and purpose of a
particular Code provision. See H.R. Rep. No. 83-2543, at 59 (1954)
(Conf. Rep.) (``Both the House provisions and the Senate amendment
provide for the use of the `entity' approach in the treatment of
transactions between a partner and a partnership . . . . No inference
is intended, however, that a partnership is to be considered as a
separate entity for the purpose of applying other provisions of the
internal revenue laws if the concept of the partnership as a collection
of individuals is more appropriate for such provisions.''); see also
Holiday Village Shopping Center v. United States, 5 Cl. Ct. 566, 570
(1984), aff'd 773 F.2d 276 (Fed. Cir. 1985) (``[T]he proper inquiry is
not whether a partnership is an entity or an aggregate for purposes of
applying the internal revenue laws generally, but rather which is the
more appropriate and more consistent with Congressional intent with
respect to the operation of the particular provision of the Internal
Revenue Code at issue.''); Casel v. Commissioner, 79 T.C. 424, 433
(1982) (``When the 1954 Code was adopted by Congress, the conference
report . . . clearly stated that whether an aggregate or entity theory
of partnerships should be applied to a particular Code section depends
upon which theory is more appropriate to such section.''); Sec. 1.701-
2(e)(1) (``The Commissioner can treat a partnership as an aggregate of
its partners in whole or in part as appropriate to carry out the
purpose of any provision of the Internal Revenue Code or the
regulations promulgated thereunder.'').
Consistent with this authority under subchapter K, the Treasury
Department and the IRS have previously adopted the aggregate approach
to partnerships to carry out the purpose of various provisions,
including international provisions, of the Code. In addition to
applying the aggregate approach for purposes of determining section 951
and section 951A inclusions in the final section 951A regulations and
the final regulations, regulations under section 871 apply the
aggregate approach in applying the 10 percent shareholder test of
section 871(h)(3) to determine whether interest paid to a partnership
would be considered portfolio interest under section 871(h)(2). Sec.
1.871-14(g)(3)(i). The aggregate approach was also adopted in
regulations issued under section 367(a) to address the transfer of
property by a domestic or foreign partnership to a foreign corporation
in an exchange described in section 367(a)(1). See Sec. 1.367(a)-
1T(c)(3)(i)(A). Similarly, the Treasury Department and the IRS adopted
the aggregate approach for purposes of applying the regulations under
section 367(b). See Sec. 1.367(b)-2(k); see also Sec. Sec. 1.367(e)-
1(b)(2) (treating stock and securities of a distributing corporation
owned by or for a partnership (domestic or foreign) as owned
proportionately by its partners) and 1.861-9(e)(2) (requiring certain
corporate partners to apportion interest expense, including the
partner's distributive share of partnership interest expense, by
reference to the partner's assets).
III. PFIC Rules
A. Section 1291
Under section 1291, a United States person (``U.S. person'') may be
subject to ordinary income treatment and an interest charge when it
receives an ``excess distribution'' from a PFIC or recognizes gain on
the sale or disposition of PFIC stock (the ``excess distribution
rules''). These charges are determined based on the person's holding
period and the years in which the foreign corporation qualified as a
PFIC. The excess distribution rules do not apply, however, if a
shareholder makes certain elections with respect to the PFIC for its
entire holding period of the PFIC stock.
The Treasury regulations under section 1291 apply the excess
distribution rules to ``shareholders'' of a PFIC. See Sec. 1.1291-
1(b)(2)(v). Under Sec. 1.1291-1(b)(7), a ``shareholder'' of a PFIC
generally is defined as a U.S. person that owns PFIC stock directly or
indirectly through certain corporations or pass-through entities (an
``indirect shareholder''), within the meaning of section 1298(a) and
Sec. 1.1291-1(b)(8) (collectively, a ``PFIC shareholder''). For
purposes of sections 1291 and 1298, neither a domestic partnership nor
an S corporation is treated as a PFIC shareholder except for purposes
of any information reporting requirements (including the requirement to
file an annual report under section 1298(f)) or where otherwise
explicitly provided in regulations. Section 1.1291-1(b)(8)(iii)(A) and
(B) provides that if a domestic partnership or S corporation owns PFIC
stock, the partners or S corporation shareholders, respectively, are
considered to own the PFIC stock proportionately in accordance with
their ownership interests. As a result, if a domestic partnership or S
corporation owns PFIC stock, the excess distribution rules apply at the
partner or S corporation shareholder level.
B. Qualified Electing Funds
A PFIC shareholder may elect to treat the PFIC as a QEF (a ``QEF
election'') under the rules in sections 1293 through 1295 (the ``QEF
rules''). Under the QEF rules, provided the PFIC complies with certain
information reporting requirements, the PFIC shareholder includes its
pro rata share of the ordinary earnings and net capital gain generated
by the QEF on a current basis under section 1293(a) (``QEF
inclusions''), and any gain on a future disposition of the QEF shares
may be treated as capital gain not subject to the excess distribution
rules. Unlike for the excess distribution rules, under Sec. 1.1295-
1(j) domestic partnerships and S corporations are treated as PFIC
shareholders for purposes of the QEF rules. A PFIC shareholder making a
valid QEF election effective as of the beginning of its holding period
in the PFIC stock is not subject to the excess distribution rules with
respect to that PFIC (a ``pedigreed QEF''). Conversely, a PFIC
shareholder that makes a QEF election effective after the beginning of
its holding period in the PFIC stock is simultaneously subject to the
excess distribution rules and the QEF rules with respect to that PFIC
(an ``unpedigreed QEF'').
A domestic partnership or S corporation that owns PFIC stock
generally makes the QEF election with
[[Page 3892]]
respect to the PFIC under Sec. 1.1295-1(d)(2)(i)(A) and (d)(2)(ii).
Section 1.1293-1(c)(1) provides that the domestic partnership or S
corporation recognizes any QEF inclusions at the entity level, and each
U.S. person that is an interest holder in the domestic partnership or S
corporation takes into account its pro rata share of the inclusions.
C. Mark-to-Market PFICs
Under section 1296 (the ``mark-to-market (MTM) rules''), if stock
in a PFIC is marketable stock (``section 1296 stock''), a U.S. person
owning that stock can make a mark-to-market election with respect to
the PFIC (an ``MTM election''). For this purpose, pursuant to section
1296(g)(1), U.S. persons may be deemed to own certain marketable stock
held by foreign partnerships, trusts, or estates. Section 1296(a)
provides that if a U.S. person makes an MTM election with respect to a
PFIC, the U.S. person is treated as if it sold the section 1296 stock
at the end of each year, with any gain being recognized as ordinary
income (``MTM gain'') and any loss potentially resulting in a deduction
(``MTM loss,'' and together with MTM gains, ``MTM amounts'').
If a domestic partnership or an S corporation owns, or is treated
as owning under Sec. 1.1296-1(e) (providing ownership rules for PFIC
stock owned through certain foreign entities), section 1296 stock, the
domestic partnership or S corporation can make an MTM election with
respect to the PFIC because the election is made by the U.S. person
owning or treated as owning the stock. See Sec. 1.1296-1(h)(1)(i). The
domestic partnership or S corporation, by virtue of being a U.S.
person, includes or deducts any MTM amounts at the entity level. See
Sec. 1.1296-1(c)(1) and (3).
D. CFC/PFIC Overlap
Section 957(a) defines a CFC as any foreign corporation in which
U.S. shareholders own (within the meaning of section 958(a)), or are
considered as owning by applying the ownership rules of section 958(b),
more than 50 percent of the total combined voting power or value of the
stock of the corporation on any day during the taxable year of the
corporation. Under section 951(b), a U.S. shareholder is a U.S. person
that owns (within the meaning of section 958(a)), or is considered as
owning by applying the ownership rules of section 958(b), at least 10
percent of the total combined voting power of all classes of stock
entitled to vote or at least 10 percent of the total value of all
classes of stock of a foreign corporation. Section 957(c) defines a
U.S. person by reference to section 7701(a)(30), which defines the term
as a citizen or resident of the United States, a domestic partnership,
a domestic corporation, and certain domestic estates and trusts.
Under section 1297(d), a foreign corporation that is both a CFC and
a PFIC (a ``CFC/PFIC'') is not considered to be a PFIC with respect to
a shareholder during the shareholder's qualified portion (as defined in
section 1297(d)(2)) of its holding period (the ``CFC overlap rule'').
The term ``qualified portion'' generally means the portion of the
shareholder's holding period during which the shareholder is a U.S.
shareholder with respect to the PFIC and during which the PFIC is also
a CFC. Generally, this means that the PFIC regime should not apply to a
U.S. person that is subject to the subpart F rules. The legislative
history to the CFC overlap rule indicates that it was enacted due to
concern about the simultaneous application of the subpart F and PFIC
regimes to the same shareholders, explaining that ``a shareholder that
is subject to current inclusion under the subpart F rules with respect
to stock of a PFIC that is also a CFC generally is not subject also to
the PFIC provisions with respect to the same stock.'' H.R. Rep. 105-
148, at 534 (1997).
E. PFIC Purging Elections
1. Section 1291(d)(2) Purging Elections
Under section 1291(d)(2), a PFIC shareholder that owns, or is
treated as owning, shares in an unpedigreed QEF may make certain
elections to ``purge'' the PFIC taint and thereby no longer be subject
simultaneously to the excess distribution and QEF rules with respect to
that PFIC. Under section 1291(d)(2)(A) and Sec. 1.1291-10, a PFIC
shareholder may elect to recognize any gain on a deemed disposition of
its PFIC stock with the gain being subject to the excess distribution
rules. Alternatively, under section 1291(d)(2)(B) and Sec. 1.1291-9,
if the unpedigreed QEF is also a CFC (that is, it is a CFC/PFIC), the
PFIC shareholder may elect to include its share of the CFC/PFIC's post-
1986 accumulated earnings and profits (``E&P'') as a dividend subject
to the excess distribution rules (together with the election described
in the preceding sentence, the ``section 1291 purging elections''). The
section 1291 purging elections are made by a PFIC ``shareholder'' as
defined in Sec. 1.1291-9(j)(3), which is a U.S. person that is a
shareholder or indirect shareholder, as defined in Sec. 1.1291-1(b)(7)
or (8), respectively. If the PFIC shareholder makes one of the section
1291 purging elections, the QEF is a pedigreed QEF with respect to the
shareholder.
2. Section 1298(b)(1) Purging Elections
Pursuant to section 1298(b)(1) and Sec. 1.1298-3, a PFIC
shareholder may make certain purging elections with respect to a
foreign corporation that qualifies as a ``former PFIC'' or a ``section
1297(e) PFIC.'' These purging elections result in the foreign
corporation no longer being treated as a PFIC as to the shareholder.
Under Sec. 1.1291-9(j)(2)(iv), a ``former PFIC'' is a foreign
corporation that satisfies neither the income test nor the asset test
under section 1297(a), but its stock held by the PFIC shareholder is
treated as stock of a PFIC as a result of section 1298(b)(1) (that is,
the corporation was a PFIC that was not a QEF at some time during the
PFIC shareholder's holding period). Pursuant to Sec. 1.1291-
9(j)(2)(v), a foreign corporation is a ``section 1297(e) PFIC'' \1\ if
it (i) qualifies as a PFIC under section 1297(a) on the first day on
which the ``qualified portion'' (as defined in section 1297(d)(2)) of
the PFIC shareholder's holding period in the foreign corporation begins
(as determined under section 1297(e)(2)); and (ii) the stock of the
foreign corporation held by the PFIC shareholder is treated as stock of
a PFIC pursuant to section 1298(b)(1) because at any time during the
PFIC shareholder's holding period of the stock, other than the
qualified portion, the corporation was a PFIC that was not a QEF.
---------------------------------------------------------------------------
\1\ Although the PFIC regulations use the term ``section
1297(e)'' PFIC, the term refers to CFC/PFICs under current section
1297(d). The regulations were issued before section 1297(e) was
redesignated as section 1297(d) by the Tax Technical Corrections Act
of 2007, Public Law 110-172, sec. 11(a)(24)(A), Dec. 29, 2007, 121
Stat 2473.
---------------------------------------------------------------------------
Similar to the section 1291 purging elections, under Sec. Sec.
1.1297-3 and 1.1298-3, a PFIC shareholder can make either a deemed sale
election or deemed dividend purging election with respect to either a
former PFIC or section 1297(e) PFIC (the ``section 1298 purging
elections'' and, together with the section 1291 purging elections, the
``PFIC purging elections''). The rules applicable to the section 1298
purging elections in Sec. Sec. 1.1297-3(a) and 1.1298-3(a) are
substantially the same as those applicable to the section 1291 purging
elections, including that each section 1298 purging election is made by
a PFIC ``shareholder'' as defined in Sec. 1.1291-9(j)(3).
[[Page 3893]]
F. PFIC Information Reporting Requirements Under Section 1298(f)
Under section 1298(f), each U.S. person that is a PFIC shareholder
as defined in Sec. 1.1291-1(b)(7) must file an annual report with
respect to the PFIC containing the information required by the IRS.
Generally, pursuant to Sec. 1.1298-1(b)(1), a U.S. person that is a
PFIC shareholder must file Form 8621, ``Information Return by a
Shareholder of a Passive Foreign Investment Company or Qualified
Electing Fund,'' if, during the shareholder's taxable year, it is (i) a
direct PFIC shareholder; (ii) an indirect PFIC shareholder that holds
any interest in the PFIC through one or more foreign entities; or (iii)
an indirect PFIC shareholder that is treated as the owner of any
portion of a domestic grantor trust that owns stock of a PFIC directly
or through one or more foreign entities.
Certain other indirect PFIC shareholders are also required to file
Form 8621. Specifically, under Sec. 1.1298-1(b)(2)(i), an indirect
PFIC shareholder that owns stock of a PFIC through one or more U.S.
persons must file Form 8621 with respect to the PFIC if, during the
indirect shareholder's taxable year, it is (i) treated as receiving an
excess distribution with respect to the PFIC; (ii) treated as
recognizing gain that is treated as an excess distribution as a result
of a disposition of the PFIC; (iii) required to recognize QEF
inclusions under section 1293(a); (iv) required to include or deduct
MTM amounts under section 1296(a); or (v) required to report the status
of an election under section 1294 with respect to the PFIC. However,
under Sec. 1.1298-1(b)(2)(ii), an indirect PFIC shareholder that is
required to either recognize QEF inclusions under section 1293(a) or
MTM amounts under section 1296(a) is generally not required to file
Form 8621 if another PFIC shareholder through which the indirect PFIC
shareholder owns its interest in the PFIC timely files Form 8621. Thus,
if an indirect PFIC shareholder is treated as owning an interest in a
PFIC by reason of an interest in a domestic partnership or S
corporation and the domestic partnership or S corporation recognizes
QEF inclusions or MTM amounts and timely files Form 8621, the indirect
PFIC shareholder is generally not required to file Form 8621. Pursuant
to Sec. 1.1298-1(b)(2)(ii), this exception does not apply to a PFIC
shareholder that transfers stock in a PFIC subject to a QEF election to
a domestic partnership or S corporation if the domestic partnership or
S corporation does not make a QEF election with respect to the PFIC
after the transfer, in which case the transferor-PFIC shareholder is
still required to file Form 8621.
G. Section 1298 Attribution of Ownership Provisions
For purposes of the entire PFIC regime, section 1298(a) contains
various attribution rules that generally apply to treat stock of a PFIC
as owned by a U.S. person. However, pursuant to section 1298(a)(1)(B),
except as provided in regulations, section 1298(a) does not apply to
treat stock owned (or treated as owned) by a U.S. person as owned by
any other person. Under section 1298(a)(3), stock owned directly or
indirectly by a partnership, estate, or trust is considered as being
owned proportionately by its partners or beneficiaries.
IV. Subpart F Rules
A. Controlling Domestic Shareholders
The controlling domestic shareholders of a foreign corporation take
certain actions with respect to the foreign corporation, such as
electing the method of calculating its E&P under section 964(a). See
Sec. 1.964-1(c)(3). Under Sec. 1.964-1(c)(5)(i), the controlling
domestic shareholders of a CFC are defined as the United States
shareholders, within the meaning of section 951(b) or section 953(c),
that, in the aggregate, own (within the meaning of section 958(a)) more
than 50 percent of the total combined voting power of all classes of
stock of the CFC entitled to vote and that undertake to act on the
CFC's behalf. If the more than 50 percent ownership requirement is not
satisfied, the controlling domestic shareholders of the CFC are all of
the U.S. shareholders that own (within the meaning of section 958(a))
stock of the CFC. Under Sec. 1.964-1(c)(5)(ii), with respect to a
noncontrolled section 902 corporation (as defined in section
904(d)(2)(E)), the controlling domestic shareholders are the majority
domestic corporate shareholders, which are those domestic corporations
that meet certain ownership requirements under section 902(a) (as it
existed before its repeal in 2017) and that own, directly or
indirectly, more than 50 percent of the combined voting power of the
stock of the noncontrolled section 902 corporation owned, directly or
indirectly, by all domestic corporations. Under Sec. 1.964-
1(c)(3)(iii), a controlling domestic shareholder that takes actions
with respect to a foreign corporation under Sec. 1.964-1(c)(3) must
provide notice of those actions to certain other domestic shareholders
of the foreign corporation.
With respect to a U.S. shareholder partnership, the 2019 proposed
regulations provided that aggregate treatment does not apply for
purposes of determining whether any U.S. shareholder is a controlling
domestic shareholder. Proposed Sec. 1.958-1(d)(2). In response to a
request for comments on this rule in the preamble to the 2019 proposed
regulations, one comment was received. That comment recommended, on
balance, that aggregate treatment should not apply for purposes of
determining whether a U.S. shareholder is a controlling domestic
shareholder for purposes of section 964.
The final regulations do not extend aggregate treatment for
purposes of determining controlling domestic shareholders of foreign
corporations and, thus, adopt the exception included in the 2019
proposed regulations. Sec. 1.958-1(d)(2)(v).
B. Treatment of S Corporation Distributions Under Section 1368 and
Treatment of S Corporations and S Corporation Shareholders Under
Section 1373 and Subpart F
1. S Corporation Distributions
Section 1368(b) and (c) provides for the treatment of distributions
made by an S corporation (as defined in section 1361(a)(1)) with
respect to its stock to which section 301(c) would apply but for
section 1368(a). Section 1368(b) addresses the treatment of those
distributions by an S corporation that does not have accumulated E&P
(``AE&P''). Section 1368(b)(1) provides that a distribution by an S
corporation is not included in the gross income of an S corporation
shareholder to the extent that the amount of the distribution does not
exceed the shareholder's adjusted basis in its S corporation stock.
Section 1368(b)(2) provides that, if the amount of the distribution
exceeds the shareholder's adjusted basis in its S corporation stock,
that excess is treated as gain from the sale or exchange of property.
Section 1368(c) addresses the treatment of distributions by an S
corporation that has AE&P (for example, if the S corporation generated
E&P in years before its election to be treated as an S corporation) and
therefore has an accumulated adjustments account (``AAA''), as defined
by section 1368(e)(1). AE&P does not include amounts that would
increase an S corporation's AAA. See section 1371(c). Accordingly, an S
corporation's AAA functions similarly to the stock basis adjustment
rules of section 1367 and is increased to account for income taxed to
its shareholders. See section
[[Page 3894]]
1368(e)(1)(A). AAA is limited to income generated by the corporation
during its status as an S corporation and preserves the single-level-
of-tax treatment to S corporation shareholders.
With regard to distributions by S corporations with AE&P, section
1368(c) first applies the distribution to the S corporation's AAA.
Section 1368(c)(1) provides that the portion of the distribution that
does not exceed the S corporation's AAA is governed by section 1368(b)
and is either not included in a shareholder's gross income (if that
amount does not exceed the shareholder's adjusted basis in its S
corporation stock) or is treated as gain from the sale or exchange of
property (if that amount does not exceed the S corporation's AAA but
exceeds the shareholder's adjusted basis in its S corporation stock).
After the application of section 1368(c)(1), section 1368(c)(2)
provides that any remaining portion of the distribution that exceeds
the amount of the S corporation's AAA is treated as a dividend (as
defined in section 316) to the extent of the S corporation's remaining
AE&P. Lastly, under section 1368(c)(3), the portion of the distribution
remaining after the application of section 1368(c)(1) and (2) is
governed by section 1368(b) and either not included in gross income or
treated as gain, depending on the shareholder's adjusted basis in its S
corporation stock.
2. Treatment of S Corporations for Purposes of Subpart F
Section 1373(a) provides that an S corporation is treated as a
domestic partnership and its shareholders as partners of a domestic
partnership for purposes of subpart F of the Code, which includes
sections 951, 951A, and 958. Therefore, under Sec. 1.958-1(d)(1) of
the final regulations, for purposes of determining section 951 or
section 951A inclusions with respect to a CFC owned by an S
corporation, the S corporation is not treated as owning the CFC's stock
within the meaning of section 958(a). Instead, the CFC stock is treated
as owned by a foreign partnership for purposes of determining the U.S.
person that owns the CFC stock within the meaning of section 958(a).
As a result, section 951 or section 951A inclusions with respect to
CFC stock held by an S corporation are determined and taken into
account at the S corporation shareholder level but only if the S
corporation shareholder is a U.S shareholder of the CFC. With respect
to S corporations with AE&P, this aggregate treatment does not increase
the S corporation's AAA because any section 951 or section 951A
inclusions are taken into account directly by the S corporation
shareholders. An S corporation's AAA generally is increased, however,
by dividends received by the S corporation from a foreign corporation
even if the E&P from which the dividend distributions are made is
attributable to amounts that are, or have been, included in gross
income of one or more shareholders of the S corporation under section
951(a) or 951A(a). See section 1368(e)(1)(A). In contrast, if section
951 and 951A amounts were included by a S corporation, the S
corporation's AAA would not be increased for distributions excluded
from the S corporation's gross income pursuant to section 959(a).
3. Notice 2020-69
In response to the final section 951A regulations, a comment
asserted that aggregate treatment for purposes of computing section
951A inclusions is inappropriate for S corporations, notwithstanding
the language of section 1373(a) (treating an S corporation as a
partnership and S corporation shareholders as partners of a
partnership), particularly where an S corporation has AE&P.
Specifically, the comment suggested that the aggregate approach creates
a mismatch between when S corporation shareholders recognize income
with respect to a CFC and the creation of AAA maintained by the S
corporation. This mismatch can cause certain distributions out of AE&P
made by an S corporation to be taxable to its shareholders despite the
fact that the shareholders were already taxed on the CFC's earnings
under the final section 951A regulations.
Notice 2020-69, 2020-39 I.R.B. 604, released on September 1, 2020,
announced that the Treasury Department and the IRS intend to issue
regulations under section 958 to ease the transition of S corporations
with AE&P on September 1, 2020, from the historic entity treatment (and
the hybrid treatment under proposed Sec. 1.951A-5) to the aggregate
treatment required under the final section 951A regulations (the ``S
corporation transition approach''). Under the S corporation transition
approach, an S corporation is subject to entity treatment with respect
to a taxable year if (i) an election is made; (ii) the corporation has
elected S corporation status before June 22, 2019; (iii) the S
corporation would be treated as owning, within the meaning of section
958(a), stock of a CFC on June 22, 2019, if entity treatment applied;
(iv) the S corporation has ``transition AE&P'' on September 1, 2020, or
on the first day of any subsequent taxable year; and (v) the S
corporation maintains records to support the determination of the
transition AE&P amount. Under this entity treatment, an S corporation
that owns stock of a CFC is treated as owning, within the meaning of
section 958(a), the CFC stock for purposes of applying section 951A
such that the S corporation determines its GILTI inclusion amount, and
its shareholders take into account their distributive share of that
amount. Generally, an electing S corporation is treated as an entity
under the S corporation transition approach until the first taxable
year for which it has no transition AE&P on the first day of that year,
at which point it is treated as an aggregate of its shareholders for
that year and each successive year.
C. Related Person Insurance Income
Section 952(a) provides that subpart F income includes insurance
income, as defined in section 953. Under section 953(c)(2), RPII is any
insurance income (as defined in section 953(a)) attributable to a
policy of insurance or reinsurance that directly or indirectly insures
a United States shareholder (as defined in section 953(c)(1)(A)) of the
controlled foreign corporation (as defined in section 953(c)(1)(B)), or
a person related to that shareholder. Under section 953(c)(1)(A), the
term ``United States shareholder'' means, with respect to any foreign
corporation, a U.S. person (as defined in section 957(c)) who owns
(within the meaning of section 958(a)) any stock of the foreign
corporation (``RPII U.S. shareholder''). Section 953(c)(1)(B) provides
that the term ``controlled foreign corporation'' has the meaning given
to such term by section 957(a) determined by substituting ``25 percent
or more'' for ``more than 50 percent'' (``RPII CFC'').
On April 17, 1991, the Treasury Department and the IRS published in
the Federal Register proposed regulations under section 953 (INTL-939-
86, 56 FR 15540) (the ``1991 proposed regulations''). Section 1.953-3
of the 1991 proposed regulations contains, among other provisions,
general rules for determining RPII and definitions that apply for RPII
purposes. Section 1.953-3(b)(1) of the 1991 proposed regulations
defines RPII as premium and investment income attributable to a policy
of insurance or reinsurance that provides insurance coverage to a
related insured on risks located outside the RPII CFC's country of
incorporation and also provides an analogous rule for annuity
contracts.
Section 1.953-3(b)(5) of the 1991 proposed regulations provides
that insurance income attributable to a cross-insurance arrangement is
treated as
[[Page 3895]]
RPII. In general, a cross-insurance arrangement is an arrangement in
which a RPII CFC insures a person that is not a related insured and, as
part of the same arrangement, another person insures a person that
would be a related insured if insured by the RPII CFC.
The cross-insurance rule was issued pursuant to section
953(c)(8)(A), which as the Conference Report states, ``requires the
Secretary to prescribe such regulations as may be necessary to carry
out the purposes of the new sub-part F rules for captive insurers,
including regulations preventing the avoidance of the new rules through
cross-insurance arrangements or otherwise.'' H.R. Rep. No. 99-841 at
II-620 (Sep. 18, 1986) (emphasis added). Congress recognized the need
for regulations because cross-insurance can be used to replicate the
economics and tax benefits of a captive insurance arrangement through
cooperative risk sharing while improperly avoiding the application of
section 953(c)(2). ``The conferees do not believe that U.S.
shareholders should be able to obtain the deferral of U.S. tax on
income attributable to insurance of risks of U.S. persons who are in
turn insuring the risks of those shareholders. Accordingly, under the
regulations, the income of the two companies in the example
attributable to the insurance business described [in a cross-insurance
arrangement] is to be treated as related person insurance income.'' Id.
at II-621.
Regulatory activity on the 1991 proposed regulations was suspended
in 1999 due to the temporary enactment of changes to the definition of
insurance income under section 953 and the temporary enactment of
section 954(i) (together, the ``Insurance Active Financing
Exception''). See Unified Agenda, 64 FR 21831 (Apr. 26, 1999). These
statutory changes were adopted on a permanent basis by the Protecting
Americans from Tax Hikes Act of 2015, Public Law 114-113 (Dec. 18,
2015). Although much of the 1991 proposed regulations requires
modification to account for the Insurance Active Financing Exception,
other provisions in the 1991 proposed regulations, including the cross-
insurance rule, were not affected by the statutory changes.
V. Net Investment Income Tax
Section 1411 imposes a 3.8-percent tax on the net investment income
of certain individuals, trusts, and estates. Under Sec. 1.1411-10(g),
an election can be made with respect to a CFC or PFIC that is a QEF to
treat amounts included in income under section 951(a) or section
1293(a)(1)(A) with respect to the CFC or QEF as net investment income
for purposes of Sec. 1.1411-4(a)(1)(i), and to take amounts included
in income under section 1293(a)(1)(B) into account for purposes of
calculating the net gain attributable to dispositions of property under
Sec. 1.1411-4(a)(1)(iii). Pursuant to Sec. 1.1411-10(g)(3), the
election may be made by any individual, estate, trust, domestic
partnership, S corporation, or common trust fund that owns the relevant
CFC or QEF directly or indirectly through one or more foreign entities.
In addition, if a domestic partnership, S corporation, estate, trust,
or common trust fund that directly owns the CFC or QEF does not make
the election, an individual, estate, trust, domestic partnership, S
corporation, or common trust fund that owns the CFC or PFIC indirectly
through the non-electing entity may itself make the election. Sec.
1.1411-10(g)(3).
Explanation of Provisions
I. PFIC Rules
A. Definition of PFIC Shareholder
The Treasury Department and the IRS have concluded that, because
domestic partnerships and S corporations should be treated as
aggregates of their partners and shareholders, respectively, for
purposes of the QEF and MTM rules (see parts I.B.1 and I.C.1 of this
Explanation of Provisions), the definition of shareholder under Sec.
1.1291-1(b)(7) should be updated to reflect aggregate treatment for
purposes of the PFIC regime. Thus, under the proposed regulations,
neither domestic partnerships nor S corporations are considered
shareholders for purposes of making QEF or MTM elections, recognizing
QEF inclusions or MTM amounts, making PFIC purging elections, or filing
Forms 8621. Proposed Sec. Sec. 1.1291-1(b)(7), 1.1295-1(j)(3), 1.1296-
1(a)(4).
B. QEF Rules
1. Treatment of Pass-Through Entities for Purposes of Sections 1293 and
1295
Various comments in response to the 2019 proposed regulations
addressed the treatment of domestic partnerships as aggregates of their
partners for purposes of the QEF rules. Some comments requested that
domestic partnerships continue to be treated as PFIC shareholders for
purposes of making QEF elections and recognizing QEF inclusions based
on administrability considerations (including reducing compliance
burdens for small partners) and access to information. Other comments
recommended an aggregate approach to QEFs, citing consistency with
section 951, section 951A, and other aspects of the PFIC regime
(specifically sections 1291, 1294, and 1297(d)). Additionally, comments
recommended that, because QEF inclusions are taken into account in
computing taxable income at the partner level, a partner should
determine whether the QEF rules apply. One comment recommended a
transition to an aggregate approach to QEFs with an alternative that
would permit a domestic partnership to make a QEF election on behalf of
its partners if permitted under the partnership agreement.
The Treasury Department and the IRS have concluded that it is more
appropriate to treat domestic partnerships and S corporations as
aggregates of their partners and shareholders, respectively, for
purposes of sections 1293 and 1295. Aggregate treatment is consistent
with the general treatment of partnerships for purposes of the PFIC
regime under section 1298(a)(3) and aligns the QEF rules with the
treatment of domestic partnerships and S corporations for purposes of
the CFC overlap rule. It also provides partners and S corporation
shareholders, the persons most affected by a QEF election, with the
ability to decide whether to make the election. In addition, the new
reporting by partnerships on Schedule K-2, ``Partners' Distributive
Share Items--International,'' and Schedule K-3, ``Partner's Share of
Income, Deductions, Credits, etc.--International'' is expected to
facilitate a partner's ability to make the QEF election. The Treasury
Department and the IRS are aware that in limited circumstances, as a
result of certain nonconforming tax years between a partner and a
partnership, the partner may be required to file its return on which it
makes a QEF election (and includes its QEF inclusion) before the
deadline for the partnership to provide it with Schedule K-3. In such a
case, the Treasury Department and the IRS expect that a partner seeking
to make a QEF election will make arrangements with the partnership to
provide the partner with the necessary information in a timely fashion.
Accordingly, the proposed regulations provide that a partner or S
corporation shareholder, rather than the domestic partnership or S
corporation, respectively, makes a QEF election, and each electing
partner or S corporation shareholder must notify the partnership or S
corporation, respectively, of the election to assist the partnership or
S corporation with information reporting and tracking basis in the QEF
stock. Proposed Sec. 1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A).
Similarly, partners and S corporation shareholders include their
[[Page 3896]]
pro rata shares of ordinary earnings and net capital gain attributable
to the QEF stock as if such shareholder owned its share of the QEF
stock directly, and not as a share of the pass-through entity's income.
See proposed Sec. 1.1293-1(c)(1). Contrary to the current regulations,
however, a QEF election made under proposed Sec. 1.1295-1(d)(2)(i)(A)
or (d)(2)(ii)(A) by a partner or S corporation shareholder with respect
to PFIC stock held indirectly through a domestic partnership or S
corporation applies to all stock of that PFIC owned by such partner or
S corporation shareholder, even if owned outside of the partnership or
S corporation.
In response to the comments' concerns regarding the
administrability of partner-level QEF elections, the Treasury
Department and the IRS request comments on whether final regulations
should permit a domestic partnership- or S corporation-level QEF
election on behalf of its partners or shareholders, respectively, in
conjunction with the general rule requiring the partner or shareholder
to make the election. Comments should specifically address (i) the
legal mechanism by which the domestic partnership or S corporation
would be delegated the ability to make a QEF election on behalf of its
partners or shareholders; (ii) the standard of delegation that should
be required, including whether delegation should be based on the
partnership agreement or the S corporation's organizational documents,
or some other instrument, and, if so, whether delegation should be
explicit or implicit within the instrument; (iii) whether the domestic
partnership or S corporation's election should be binding on all
partners or shareholders, or only on certain partners or shareholders;
(iv) if binding on all partners or shareholders, whether certain
partners or shareholders should be allowed to opt out and whether an
opt-out is consistent with the current rules; and (v) the timing,
filing, and notification requirements that should apply to a domestic
partnership- or S corporation-level QEF election, taking into account
the possibility of nonconforming taxable years among the partners and
partnership (or shareholders and S corporation) and the QEF.
2. Transfers of Stock to Domestic Pass-Through Entities
The current regulations include special rules that apply when stock
of a PFIC subject to a QEF election is transferred to a domestic pass-
through entity, depending on whether the transferee entity makes a QEF
election with respect to the transferred PFIC. Under Sec. 1.1293-
1(c)(2)(i), if PFIC stock subject to a QEF election is transferred to a
domestic pass-through entity of which the transferor is an interest
holder, and the transferee pass-through entity makes a QEF election
with respect to the PFIC, thereafter the transferor and other interest
holders that become PFIC shareholders as a result of the transfer begin
taking into account their pro rata shares of the pass-through entity's
QEF inclusions. However, under Sec. 1.1293-1(c)(2)(ii), if the
transferee pass-through entity does not make a QEF election with
respect to the transferred PFIC, the transferor-shareholder (but not
other indirect shareholders resulting from the transfer) continues to
be subject to QEF inclusions with respect to the PFIC.
To provide consistency with the aggregate treatment of domestic
partnerships and S corporations under the QEF rules, the proposed
regulations provide that, if a shareholder transfers stock of a PFIC
with respect to which it has made a QEF election to a pass-through
entity, the transferor continues to be subject to QEF inclusions with
respect to the transferred stock, and the other interest holders of the
pass-through entity are subject to QEF inclusions from the PFIC only if
they make a QEF election with respect to the transferred stock.
Proposed Sec. 1.1293-1(c)(3)(i) and (ii). However, because domestic
nongrantor trusts continue to be shareholders for purposes of the QEF
rules, the proposed regulations retain the rule in current Sec.
1.1293-1(c)(2)(i) but limit its application to domestic nongrantor
trusts. Therefore, if stock of a PFIC subject to a QEF election is
transferred to a domestic nongrantor trust, and the transferee trust
makes a QEF election with respect to the stock, the electing trust
includes its pro rata share of the QEF inclusions, and its
beneficiaries account for such amounts according to the general rules
applicable to inclusions of income from the trust. See proposed Sec.
1.1293-1(c)(3)(iii). If the domestic nongrantor trust does not make a
QEF election with respect to the transferred stock, only the transferor
is subject to QEF inclusions with respect to the transferred stock. Id.
3. Continuation of Preexisting QEF Elections
The Treasury Department and the IRS have concluded that QEF
elections made by a domestic partnership or S corporation that are
effective for taxable years of a PFIC ending on or before the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register (such PFIC a ``preexisting QEF,''
and the election, a ``preexisting QEF election'') will continue for any
partner or S corporation shareholder owning an interest in a
preexisting QEF on that date. See proposed Sec. 1.1295-1(d)(2)(i)(B),
(d)(2)(ii)(B), and (f)(3). Treating the preexisting QEF elections as if
they were effectively made by each partner or S corporation shareholder
owning an interest in the preexisting QEF before the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register should minimize the number of
additional QEF elections required by partners and S corporation
shareholders, thus making the QEF rules more administrable for
taxpayers and the IRS when transitioning from the historic entity
approach to the aggregate approach of the proposed regulations.
However, although a new election is not required to be made with
respect to a preexisting QEF by partners or S corporation shareholders
that indirectly owned the QEF before the finalization of the proposed
regulations, they are subject to QEF inclusions under the new aggregate
approach. See proposed Sec. 1.1293-1(c)(1).
4. Additional Changes to QEF Rules
The proposed regulations make several modifications to the rules
that characterize stock held through a pass-through entity under Sec.
1.1295-1(b)(3)(iv). First, consistent with the general aggregate
approach to domestic pass-through entities under the QEF rules (other
than domestic nongrantor trusts and domestic estates), the rule now
governs how stock of a PFIC will be treated as stock of a pedigreed QEF
to a shareholder, as defined in proposed Sec. 1.1295-1(j)(3), rather
than all interest holders or beneficiaries of a pass-through entity as
under the current provision. This paragraph is also modified to address
both the treatment of PFICs as pedigreed QEFs to shareholders owning
such PFICs through domestic partnerships and S corporations that have
made preexisting QEF elections, and the treatment of PFICs owned
through domestic pass-through entities (other than domestic nongrantor
trusts and domestic estates) to shareholders making the QEF election.
Further, the rule addresses the treatment of PFICs as pedigreed QEFs
when PFIC stock is acquired by, or transferred to, pass-through
entities. See proposed Sec. 1.1295-1(b)(3)(iv)(A) through (C).
Additionally, in order to ensure the proper application of proposed
Sec. 1.1295-1(b)(3)(iv), proposed Sec. 1.1295-1(b)(3)(iv)(A) and (B)
do not
[[Page 3897]]
apply to transactions in which gain is not fully recognized.
The proposed regulations also make several changes to conform Sec.
1.1295-1 to the general aggregate treatment of domestic pass-through
entities (other than domestic non-grantor trusts and domestic estates)
under the QEF rules. These changes include (i) limiting the application
of paragraphs (b)(3)(i) and (ii) to domestic nongrantor trusts and
domestic estates, which are the only domestic pass-through entities
that may make a QEF election under the proposed regulations; (ii)
applying the partnership termination rule only with respect to
partnerships that have made preexisting QEF elections and their
partners; (iii) revising rules governing the treatment of PFIC stock
distributed by a partnership as stock of a pedigreed QEF to transferee
partners; and (iv) providing that shareholders owning QEF stock through
a domestic partnership or S corporation that has made a preexisting QEF
election are required to file Form 8621 for such QEFs. Proposed Sec.
1.1295-1(b)(3)(i) through (iii) and (v) and (f)(2)(i). In addition, the
proposed regulations remove the rule in Sec. 1.1295-1(i)(1)(ii) that
allows the Commissioner to invalidate a pass-through entity QEF
election with respect to a shareholder if, as a result of nonconforming
taxable years between the shareholder and a pass-through entity, the
QEF inclusion is not included in income within two years of the PFIC's
year end. The rule was removed because it specifically applies to pass-
through entity QEF elections and inclusions, which, as a result of
aggregate treatment, generally will only be relevant in limited
circumstances involving domestic trusts. The Commissioner continues to
have discretion to invalidate or terminate a shareholder's QEF election
in appropriate circumstances if the requirements of section 1295 are
not met by a shareholder, an intermediary, or the relevant PFIC. Sec.
1.1295-1(i)(1)(i).
C. MTM Rules
1. Treatment of Pass-Through Entities for Purposes of Section 1296
The Treasury Department and the IRS received comments addressing
the treatment of domestic partnerships as aggregates of their partners
for purposes of the MTM rules, which generally were similar to the
comments received with respect to QEFs. For reasons similar to those
noted for QEFs, some comments recommended maintaining entity treatment
of domestic partnerships under the MTM rules for administrability
reasons, such as reduced compliance burdens for small partners and
limited access to information. Other comments recommended an aggregate
approach to maintain consistency with sections 951 and 951A and the
PFIC regime (including the comments' proposed aggregate treatment of
domestic partnerships for the QEF rules) and to allow the persons most
affected by a MTM election, the partners, to determine whether the MTM
rules apply. The comment discussed in part I.B.1 of this Explanation of
Provisions that recommended an alternative that would permit a domestic
partnership to make a QEF election on behalf of its partners made the
same recommendation with respect to MTM elections.
For the reasons noted by the comments recommending an aggregate
approach and to further consistency in the treatment of domestic
partnerships and S corporations across the PFIC regime, the Treasury
Department and the IRS have concluded that domestic partnerships and S
corporations should also be treated as aggregates of their partners and
shareholders, respectively, for purposes of the MTM rules. Accordingly,
the proposed regulations extend aggregate treatment to domestic
partnerships and S corporations for purposes of the MTM rules by
providing that the MTM rules apply to PFIC shareholders, as defined in
proposed Sec. 1.1291-1(b)(7), which term does not include domestic
partnerships or S corporations. See proposed Sec. 1.1296-1(a)(4) and
(e). As a result, partners of a domestic partnership or S corporation
shareholders make an MTM election with respect to PFIC stock owned
through the partnership or S corporation and determine their own MTM
gain or loss, rather than taking into account their distributive share
of the domestic partnership or S corporation's MTM gain or loss. See
proposed Sec. 1.1296-1(b)(1) and (c)(1) and (3). Partners and S
corporation shareholders making an MTM election with respect to a PFIC
held through a partnership or S corporation, respectively, must notify
the partnership or S corporation of the election to assist the
partnership or S corporation with information reporting and tracking
basis in the PFIC stock. Proposed Sec. 1.1296-1(h)(1)(i)(B).
Incorporating the proposed Sec. 1.1291-1(b)(7) definition of
shareholder into Sec. 1.1296-1 also clarifies that the MTM rules apply
to grantors of domestic grantor trusts that own PFIC stock, and that
domestic nongrantor trusts and domestic estates continue to be treated
as entities for purposes of the MTM rules.
To reflect the transition to the aggregate treatment of domestic
partnerships and S corporations for purposes of the MTM rules, various
other conforming changes are made to apply the MTM rules to PFIC
shareholders rather than U.S. persons. See proposed Sec. 1.1296-
1(b)(2) and (3); Sec. 1.1296-1(c)(5); Sec. 1.1296-1(d)(1) and (2);
Sec. 1.1296-1(e) and (f); Sec. 1.1296-1(g)(1) and (2); Sec. 1.1296-
1(h)(1)(i) and (ii); Sec. 1.1296-1(h)(2)(ii); Sec. 1.1296-1(h)(3);
and Sec. 1.1296-1(i)(1). Additionally, the rule in Sec. 1.1296-
1(g)(3), providing that when an MTM PFIC is owned through certain
foreign pass-through entities any MTM gain or loss is determined as of
the end of the foreign pass-through entity's tax year, has been
removed. Under the general aggregate treatment of pass-through entities
(besides domestic nongrantor trusts and domestic estates) for purposes
of the MTM rules, the appropriate taxable year with respect to which
any MTM gain or loss is determined is the taxable year end of the
shareholder that owns the MTM PFIC through a pass-through entity, not
the pass-through entity's taxable year.
As in part I.B.1 of this Explanation of Provisions, the Treasury
Department and the IRS request comments on whether a form of
partnership- or S corporation-level MTM election could be accommodated
in final regulations. Comments should address the same considerations
noted in part I.B.1 of this Explanation of Provisions regarding the
delegation of authority to make an MTM election to a domestic
partnership or S corporation.
2. Continuation of Preexisting MTM Elections
The Treasury Department and the IRS have concluded that MTM
elections made with respect to a PFIC by a domestic partnership or S
corporation for taxable years of the PFIC ending on or before the date
of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register (``preexisting MTM election'')
should be treated as made by any partner or S corporation shareholder
owning its interest on that date. This treatment should minimize the
number of additional MTM elections that would be made by such partners
or S corporation shareholders, thus making the MTM rules more
administrable for taxpayers and the IRS as a result of the transition
from the historic entity approach to the aggregate approach of the
proposed regulations. Accordingly, MTM elections made by domestic
[[Page 3898]]
partnerships and S corporations effective for taxable years of a PFIC
ending on or before finalization of the proposed regulations under
proposed Sec. 1.1296-1(h)(1)(i)(A) continue to be valid and will be
treated as made by the owners of such entities. As a result, going
forward the owners of those entities will determine their MTM gain or
loss as if they held the section 1296 stock directly.
3. Modifications to the MTM Coordination Rule
Under section 1296(j) and Sec. 1.1296-1(i), if a taxpayer makes an
MTM election with respect to a foreign corporation that was a PFIC
(other than a QEF) before the first taxable year to which the MTM
election was effective, the excess distribution rules apply to any (i)
distributions by the PFIC with respect to the section 1296 stock; (ii)
disposition of the section 1296 stock; and (iii) MTM gain recognized on
the last day of the U.S. person's taxable year (the ``MTM coordination
rule''). Before the proposed regulations, if section 1296 stock subject
to the MTM coordination rule was held by a domestic partnership or S
corporation, it may have been unclear how to apply the MTM coordination
rule since the excess distribution rules are not applied at the
domestic partnership or S corporation level.
Accordingly, to conform to the general transition to an aggregate
approach under the MTM rules, the proposed regulations clarify that the
MTM coordination rule is applied to a PFIC shareholder. See proposed
Sec. 1.1296-1(i)(2) introductory text and (i)(2)(ii). To coordinate
with MTM rules other than those under section 1296, the proposed
regulations also modify Sec. 1.1291-1(c)(4)(ii) so that computations
apply to PFIC shareholders.
D. CFC Overlap Rule
1. Application Based on Aggregate Treatment for Sections 951 and 951A
The CFC overlap rule provides that, for purposes of the PFIC
regime, a corporation is not treated as a PFIC with respect to a
shareholder during the qualified portion of the shareholder's holding
period with respect to stock in the corporation. Section 1297(d)(1).
Thus, this rule applies separately with respect to each shareholder of
the foreign corporation, and the foreign corporation may be a PFIC with
respect to one shareholder but not another. The CFC overlap rule was
intended to eliminate the simultaneous application of the subpart F and
PFIC regimes only for a shareholder that is ``subject to current
inclusion under the subpart F rules.'' H.R. Rep. 105-148 at 534.
Under the final regulations (and Sec. 1.951A-1(e) as applicable
before the final regulations), domestic partnerships and S corporations
do not have inclusions under section 951 or section 951A and, because
the inclusions are instead determined directly and solely by the
partners or S corporation shareholders that are U.S. shareholders,
partners and S corporation shareholders that are not U.S. shareholders
do not have section 951 or section 951A inclusions. See Sec. 1.958-
1(d)(1). Thus, a U.S. person that is not a U.S. shareholder of a
foreign corporation that would otherwise be a PFIC with respect to that
person if held directly should not be permitted to rely on the CFC
overlap rule to avoid the PFIC regime simply because the U.S. person
owns its interest in the foreign corporation indirectly through a
domestic partnership or S corporation.
Although section 1297(d) does not define the term ``shareholder''
for this purpose, under Sec. 1.1291-1(b)(7), a domestic partnership or
S corporation is not a shareholder to which the CFC overlap rule
applies.\2\ Thus, this regulation sets forth an exception to the
general rule in section 1298(a)(1)(B), which provides that a U.S.
person is not treated as constructively owning stock that is owned by
another U.S. person (including, for example, a domestic partnership).
Accordingly, under the general rule of section 1298(a)(1)(A),
constructive ownership of PFIC stock under section 1298(a) applies to
the extent that the effect is to treat PFIC stock held by a domestic
partnership or S corporation as owned by partners and shareholders of
the entities that are U.S. persons. The ownership provisions of section
1298(a), in turn, apply for purposes of sections 1291 through 1298,
including section 1297(d). Thus, neither a domestic partnership nor an
S corporation is a shareholder for purposes of section 1297(d) by
operation of Sec. 1.1291-1(b)(7), notwithstanding that, under Sec.
1.958-1(d)(2)(i), a domestic partnership or an S corporation may be a
U.S. shareholder of the foreign corporation within the meaning of
section 951(b). Consistent with this aggregate approach to section 951
and section 951A in applying the CFC overlap rule under the existing
regulations, the proposed regulations confirm that for purposes of
section 1297(d), the term ``qualified portion'' does not include any
portion of a domestic partner or S corporation shareholder's holding
period during which the partner or shareholder was not a U.S.
shareholder with respect to the CFC/PFIC. Proposed Sec. 1.1291-
1(c)(5)(i).
---------------------------------------------------------------------------
\2\ Section 1.1291-1(b)(7) provides that a PFIC shareholder is a
U.S. person that directly owns PFIC stock or that is an indirect
shareholder under Sec. 1.1291-1(b)(8); further, it states that for
purposes of sections 1291 and 1298, neither a domestic partnership
nor an S corporation is treated as a PFIC shareholder, except for
information reporting purposes. This definition of shareholder was
first adopted as a temporary regulation, applicable to taxable years
of shareholders ending on or after December 31, 2013 (T.D. 9650, 78
FR 79602, 79608 (Dec. 31, 2013)) and was subsequently issued as a
final regulation without substantive change with the same
applicability date (T.D. 9806, 81 FR 95459, 95465 (Dec. 28, 2016)).
Both temporary and final Sec. 1.1291-1(b)(7) were issued after
several private letter rulings (``PLRs''), such as PLR 201108020
(Feb. 25, 2011) and PLR 200943004 (Oct. 23, 2009), which were issued
with respect to the application of section 1297(d) to domestic
partnerships.
---------------------------------------------------------------------------
2. Transition Rule for Entity Treatment
Although the CFC overlap rule, in conjunction with the shareholder
definition in Sec. 1.1291-1(b)(7), properly reflects the aggregate
approach to subpart F (as discussed in part III.A of this Explanation
of Provisions), the Treasury Department and the IRS have determined
that the application of these rules could lead to inappropriate results
under the entity approach to subpart F that applied under prior law. In
particular, under entity treatment for subpart F, the CFC overlap rule
would not apply with respect to partners or S corporation shareholders
of the CFC/PFIC that were not U.S. shareholders even though they would
take into account their share of inclusions of the domestic partnership
or S corporation under section 951 and, as applicable, section 951A.
Thus, the CFC/PFIC would be treated as a PFIC with respect to such
partners or S corporation shareholders even though the partner or
shareholder was subject to current inclusions under the subpart F
regime.
Accordingly, the Treasury Department and the IRS have determined
that it is appropriate to provide a transition rule that would apply to
taxable years of shareholders beginning before the date of publication
of the Treasury decision adopting these rules as final regulations in
the Federal Register, or for taxable years of shareholders of an S
corporation in which the S corporation elects to apply Sec. 1.958-
1(e). When this transition rule applies, the CFC overlap rule will
benefit certain persons that are indirect PFIC shareholders, but not
U.S. shareholders, due to owning stock of foreign corporations through
domestic partnerships or S corporations, during periods when the
shareholder was subject to current inclusions under section 951 or
section 951A (for example, under the rules described in Notices 2019-46
and 2020-69) as a
[[Page 3899]]
share of a domestic partnership or S corporation's income inclusions.
Proposed Sec. 1.1291-1(c)(5)(ii).
E. PFIC Purging Elections
Under the current regulations, it may be unclear whether a domestic
partnership or an S corporation that owns PFIC stock is eligible to
make a PFIC purging election, particularly with respect to the section
1291 purging elections, both of which require simultaneous QEF
elections that are generally made by domestic partnerships and S
corporations.
Consistent with the aggregate treatment of domestic partnerships
and S corporations for purposes of making elections and determining
income inclusions within the PFIC regime, the Treasury Department and
the IRS have determined that the PFIC purging elections with respect to
PFICs owned by partnerships and S corporations should be made at the
partner or shareholder level because each of the PFIC purging elections
can result in the recognition of excess distributions under section
1291, and those inclusions are directly taken into account at the
partner or shareholder level and rely on partner or shareholder
specific tax attributes, such as holding period. Each PFIC purging
election is made by a shareholder as defined in proposed Sec. 1.1291-
1(b)(7), which has been modified to make explicit that neither domestic
partnerships nor S corporations are PFIC shareholders for any purpose.
As a result, under the proposed regulations, PFIC purging elections are
made at the partner or S corporation shareholder level.
F. PFIC Information Reporting
Consistent with the aggregate treatment of domestic partnerships
and S corporations for purposes of the QEF and MTM rules, the Treasury
Department and the IRS have concluded that domestic partnerships and S
corporations should no longer be required to file an annual report
(Form 8621) under section 1298(f) and Sec. 1.1298-1. The requirement
to file Form 8621 applies only to PFIC shareholders within the meaning
of Sec. 1.1291-1(b)(7), which includes, for example, partners or S
corporation shareholders that indirectly own PFICs through domestic
partnerships or S corporations. Sec. 1.1298-1(a). Domestic
partnerships and S corporations will not be subject to this filing
obligation due to the revised definition of shareholder in proposed
Sec. 1.1291-1(b)(7), under which domestic partnerships and S
corporations are not PFIC shareholders for any purpose.
To reflect this change, proposed Sec. 1.1298-1(b)(1) revises the
general rule requiring a PFIC shareholder to file Form 8621 to clarify
that the requirement applies to PFIC shareholders as defined in Sec.
1.1291-1(b)(7). Additionally, proposed Sec. 1.1298-1(b)(1)(i) and (ii)
provides that the general rule concerning who has to file Form 8621
with respect to a PFIC applies to a PFIC shareholder that is either (i)
a direct PFIC shareholder or (ii) an indirect PFIC shareholder (within
the meaning of Sec. 1.1291-1(b)(8)) that holds an interest in a PFIC
through one or more entities, each of which is not a PFIC shareholder
within the meaning of Sec. 1.1291-1(b)(7). As a result, because a
domestic grantor trust is not a PFIC shareholder within the meaning of
Sec. 1.1291-1(b)(7), the proposed regulations remove Sec. 1.1298-
1(b)(1)(iii). Similarly, the proposed regulations remove Sec. 1.1298-
1(c)(6) because domestic partnerships are not PFIC shareholders under
proposed Sec. 1.1291-1(b)(7) and thus have no filing obligation under
the proposed regulations.
These changes limit the application of Sec. 1.1298-1(b)(2) (which
currently requires certain indirect shareholders to file Form 8621 when
those shareholders own an interest in a PFIC through one or more U.S.
persons) to only beneficiaries of domestic estates and domestic
nongrantor trusts, because an indirect PFIC shareholder owning stock in
a PFIC through a domestic partnership, S corporation, or domestic
grantor trust will be required to file a Form 8621 under proposed Sec.
1.1298-1(b)(1)(ii). An indirect PFIC shareholder owning stock of a PFIC
by reason of an interest in a domestic estate or domestic nongrantor
trust that recognizes its share of the estate or trust's QEF inclusions
or MTM amounts would continue to be able to rely on the exception of
Sec. 1.1298-1(b)(2)(ii) if the domestic estate or domestic nongrantor
trust files Form 8621 with respect to the QEF or MTM PFIC. The proposed
regulations remove the last sentence of Sec. 1.1298-1(b)(2)(ii)
regarding the inability to apply the exception with respect to stock in
a QEF contributed to domestic partnerships or S corporations, because
these entities cannot make a QEF election under the proposed
regulations.
The changes to the section 1298(f) information reporting
requirements in proposed Sec. 1.1298-1 reflect the general shift in
the treatment of domestic partnerships and S corporations as aggregates
for purposes of the PFIC regime. While these changes represent a change
in the PFIC shareholders required to file an annual report under
section 1298(f), a domestic partnership or S corporation will continue
to have a responsibility to report information with respect to the
PFICs it owns to its interest holders on Schedule K-3, ``Partner's
Share of Income, Deductions, Credits, etc.--International,'' of Forms
1065, ``U.S. Return of Partnership Income,'' and 1120-S, ``U.S. Income
Tax Return for an S Corporation,'' respectively, when required. The
general information reporting obligations of domestic partnerships and
S corporations with respect to their interest holders should result in
the interest holders receiving the information required to satisfy
their filing obligations under section 1298(f).
G. Other Changes
1. Section 1297(e) PFICs
The term ``section 1297(e) PFIC'' and other associated references
to ``section 1297(e)'' related to section 1297(e) before it was re-
designated as current section 1297(d) by the Tax Technical Corrections
Act of 2007. Accordingly, the proposed regulations change the defined
term ``section 1297(e) PFIC'' to ``section 1297(d) PFIC'' and replace
references to ``section 1297(e) PFICs'' and ``section 1297(e)(2)'' with
references to ``section 1297(d) PFICs'' and ``section 1297(d)(2),''
respectively.
2. Changes to Definition of Post-1986 Earnings and Profits
The term ``post-1986 earnings and profits'' is the basis upon which
a deemed dividend under Sec. Sec. 1.1291-9, 1.1297-3, and 1.1298-3 is
determined, and each of those sections generally defines the term by
reference to the definition of ``undistributed earnings, within the
meaning of section 902(c).'' However, because section 902 was repealed
by the Tax Cuts and Jobs Act, Public Law 115-97, December 22, 2017, 131
Stat 2054 (``TCJA''), the proposed regulations revise the definition of
post-1986 earnings and profits in Sec. Sec. 1.1291-9(a)(2)(i), 1.1297-
3(c)(3)(i)(A), and 1.1298-3(c)(3)(i) to eliminate references to section
902(c) and to define the term by reference to earnings and profits
computed in accordance with sections 964(a) and 986.
II. Subpart F Rules
A. Modifications to Sec. 1.964-1(c), Including Determination of
Controlling Domestic Shareholders
As discussed in part IV.A of the Background section of this
preamble, the final regulations do not extend aggregate treatment for
purposes of determining controlling domestic
[[Page 3900]]
shareholders of foreign corporations. Nevertheless, the Treasury
Department and the IRS have further considered the benefits of
maintaining entity treatment of domestic partnerships for purposes of
determining the controlling domestic shareholders of a CFC, including
the administrative convenience of centralizing the various actions
taken by controlling domestic shareholders, and have concluded that
such actions should generally be taken by those persons whose tax
liability is directly affected thereby. Accordingly, the Treasury
Department and the IRS have concluded that domestic partnerships should
be treated as aggregates for purposes of determining whether a U.S.
shareholder is a controlling domestic shareholder of a CFC. This
approach is consistent with the final regulations, which provide that
neither section 951 nor section 951A inclusions arise at the U.S.
shareholder partnership level but instead arise directly to U.S.
shareholder partners. In other words, actions that affect the
determination of inclusions under sections 951 and 951A are determined
by the same persons that have the direct inclusions under those
provisions.
Accordingly, proposed Sec. 1.958-1(d)(1) provides that domestic
partnerships are not considered to own stock of a foreign corporation
under section 958(a) for purposes of Sec. 1.964-1(c) as well as any
provision that specifically applies by reference to Sec. 1.964-1(c).
As a result, domestic partnerships and S corporations (by virtue of
section 1373(a)) would be treated as aggregates of their partners and
shareholders, respectively, for purposes of determining the controlling
domestic shareholders of foreign corporations under the proposed
regulations.
In addition to applying for purposes of determining the controlling
domestic shareholders of a foreign corporation, aggregate treatment
also generally applies for purposes of the notice requirement of Sec.
1.964-1(c)(3)(iii). Extending aggregate treatment to this notice
requirement ensures that other persons known by the controlling
domestic shareholders to be U.S. persons that own (within the meaning
of section 958(a)) stock of a foreign corporation (``domestic
shareholders'') through a domestic partnership (but that are not
themselves controlling domestic shareholders) are made aware of any
action undertaken by the controlling domestic shareholders under Sec.
1.964-1(c)(3). However, proposed Sec. 1.964-1(c)(3)(iii)(B) provides
that a controlling domestic shareholder is deemed to satisfy the notice
requirement with respect to domestic shareholders that are partners in
a domestic partnership by providing the notice to the domestic
partnership (known to the controlling domestic shareholder) through
which the domestic shareholders own stock of the foreign corporation,
which could then provide the notice to its partners that are domestic
shareholders. Additionally, to help facilitate notice to the person
that prepares and maintains the foreign corporation's books and records
for U.S. federal income tax purposes, notice is also required to be
provided to any U.S. person (such as a domestic partnership) that
controls, within the meaning of section 6038(e), the foreign
corporation (in other words, any U.S. person that is a Category 4 filer
of Form 5471, ``Information Return of U.S. Persons With Respect to
Certain Foreign Corporations,'' with respect to the foreign
corporation).
Additionally, in light of the repeal of section 902 as part of the
TCJA, the proposed regulations replace the term ``noncontrolled section
902 corporation'' in Sec. 1.964-1(c)(5)(ii) with the term
``noncontrolled foreign corporation,'' which is defined as any foreign
corporation (other than a CFC as defined in section 957 or section 953)
as to which a U.S. shareholder owns stock within the meaning of section
958(a). Proposed Sec. 1.964-1(c)(5)(ii). The proposed regulations
similarly replace the term ``majority domestic corporate shareholders''
with the term ``majority domestic shareholders,'' to reflect the repeal
of section 902. Id.
B. Treatment of S Corporations With AE&P
After the issuance of Notice 2020-69 (announcing an intent to issue
regulations adopting the S corporation transition approach), a comment
requested additional guidance on issues applicable to S corporations
under sections 951 and 951A. Specifically, the comment requested (i)
transition rules for taxpayers that elected into the S corporation
transition approach; (ii) guidance on the aggregate treatment of S
corporations for purposes of sections 951 and 951A; and (iii) the
ability of all S corporations to elect entity treatment similar to the
S corporation transition approach described in Notice 2020-69,
regardless of whether the S corporation has AE&P.\3\
---------------------------------------------------------------------------
\3\ This comment also requested guidance to (i) clarify the
determination of a partner's proportionate share of CFC stock in
accordance with the allocation of tested items under section 951A to
a U.S. shareholder that owns stock in a CFC through an interest in a
partnership and (ii) provide rules on the allocation of tested items
under section 951A and on the maintenance of previously-taxed
earnings and profits (``PTEP'') accounts. The long-standing issues
of measuring a partner's proportionate share of income under subpart
F as well as the treatment of targeted capital accounts are outside
the scope of these proposed regulations and therefore are not
addressed. With respect to the request for guidance related to PTEP,
the Treasury Department and the IRS intend to separately address
certain issues pertaining to partnerships and S corporations. In
particular, this guidance will include rules to address the
transition of S corporations from entity treatment to aggregate
treatment as noted in section 3.04 of Notice 2020-69.
---------------------------------------------------------------------------
The proposed regulations adopt the S corporation transition
approach, as described in Notice 2020-69. See proposed Sec. 1.958-
1(e). The Treasury Department and the IRS have concluded that the S
corporation transition approach in the proposed regulations
appropriately smooths the transition for S corporations to be on an
equal footing with domestic partnerships. The S corporation transition
approach ensures that amounts corresponding to income of a CFC already
taxed to S corporation shareholders can, even without being distributed
by the CFC, be distributed tax-free by the S corporation and have
priority over distributions of C corporation AE&P, while the latter
will continue to be taxed as dividends when distributed, consistent
with section 1368. Because section 951 and section 951A inclusions at
the entity level will generate AAA, S corporations with AE&P will be
able to make distributions to shareholders with respect to those
amounts rather than distributions of dividends out of AE&P.
The proposed regulations do not extend the S corporation transition
approach to all S corporations, regardless of AE&P. The Treasury
Department and the IRS believe that permitting all S corporations to
elect to be treated as an entity for purposes of sections 951 and 951A
is inconsistent with section 1373(a) and the aggregate approach adopted
in the final section 951A regulations and the final regulations.
Further, the Treasury Department and the IRS have determined that, in
recognition of certain issues specific to S corporations with AE&P as
of a certain date, the S corporation transition approach, with its
conditions, sufficiently transitions those S corporations that elect
entity treatment to the aggregate treatment provided in the final
section 951A regulations and the final regulations. Accordingly, this
comment is not adopted.
C. Entity Treatment Under Section 951A and Inapplicability of Penalties
The proposed regulations include the rules announced in Notice
2019-46 that permit domestic partnerships and S
[[Page 3901]]
corporations to apply the hybrid approach for taxable years ending
before June 22, 2019. Consistent with Notice 2019-46, to apply the
hybrid approach, domestic partnerships and S corporations must satisfy
certain notice requirements. Proposed Sec. 1.951A-1(e)(2)(i) and
(iii). In addition, if the domestic partnership or S corporation
satisfies these notification requirements it will not be subject to
certain penalties for failures to file or furnish statements to the
extent such failures arise from acting consistently with the 2018
proposed regulations before June 22, 2019. Proposed Sec. 1.951A-
1(e)(2)(ii).
D. Related Person Insurance Income
1. Aggregate Treatment of Partnerships
A comment in response to the 2019 proposed regulations requested
that aggregate treatment be applied to domestic partnerships for
purposes of determining RPII and that domestic partnerships be treated
the same way as foreign partnerships for this purpose. In addition, the
Treasury Department and the IRS recognize that treating a domestic
partnership as an entity for purposes of section 953(c) could produce
disproportionate RPII inclusions in light of the special rules
contained in section 953(c)(5). Therefore, proposed Sec. 1.958-1(d)(1)
modifies the list of provisions subject to aggregate treatment to
include section 953(c), and a domestic partnership is not treated as a
RPII U.S. shareholder for the purpose of characterizing income as RPII.
The proposed regulations, however, provide that Sec. 1.958-1(d)(1)
does not apply for purposes of section 953(c)(1)(A) in determining
whether any foreign corporation is a controlled foreign corporation as
defined in section 953(c)(1)(B), 953(c)(3)(E), or 953(d)(1)(A).
Proposed Sec. 1.958-1(d)(2)(v). This approach is consistent with Sec.
1.958-1(d)(2)(ii) (providing that Sec. 1.958-1(d)(1) does not apply
for purposes of determining whether a foreign corporation is a
controlled foreign corporation as defined in section 957).
Corresponding changes are made to the definition of RPII under
proposed Sec. 1.953-3 to conform with the aggregate treatment of
partnerships under proposed Sec. 1.958-1(d)(1). RPII is generally
defined as premium and investment income attributable to an annuity,
insurance, or reinsurance policy that directly or indirectly provides
coverage to a related insured. Proposed Sec. 1.953-3(b)(1)(i). The new
definition of RPII is modeled on the 1991 proposed regulations but has
been modified to account for the aggregate treatment of partnerships
and the Insurance Active Financing Exception. Section 1.953-3(b)(1) of
the 1991 proposed regulations is withdrawn.
A related insured is defined to include a RPII U.S. shareholder or
a person related to a RPII U.S. shareholder. Proposed Sec. 1.953-
3(b)(1)(ii)(A) and (B). In addition, if a related insured indirectly
owns stock in a RPII CFC through a partnership, the partnership is
treated as a related insured. Proposed Sec. 1.953-3(b)(1)(ii)(C). This
rule applies to foreign and domestic partnerships (other than publicly
traded partnerships) and to S corporations.
Proposed Sec. 1.953-3(b)(1)(ii)(D) also provides that a person
(other than a publicly traded corporation or partnership) is treated as
a related insured if it is more than 50 percent owned (directly,
indirectly, or constructively) by RPII U.S. shareholders. This rule is
intended to prevent the avoidance of RPII when the insured is held by
multiple RPII U.S. shareholders (or their affiliates) and is issued
pursuant to the authority granted in section 953(c)(8)(A). The Treasury
Department and the IRS request comments on whether the final
regulations should include a rule under which a U.S. person that holds
an option to acquire stock (or another non-stock interest) in a RPII
CFC also should be treated as a related insured.
The term ``related insured'' describes those persons who, if
insured, would cause a RPII CFC's income to be characterized as RPII. A
person who is not actually insured by a RPII CFC can meet the
definition of a related insured for purposes of the proposed
regulations (though a RPII CFC's income will not be characterized as
RPII unless it is attributable to a policy that provides coverage to a
related insured). No inference is intended concerning the standard for
determining whether a person is characterized as being insured for
other tax purposes.
When a partnership is insured by a RPII CFC, the amount of RPII is
determined based on the portion of the premium that is allocated to
related insureds (other than partnerships or S corporations). Proposed
Sec. 1.953-3(b)(1)(iii). In the case of tiered partnerships, the
proposed regulations take into account the portion of the premium that
is allocated to a partner who indirectly owns a partnership through one
or more upper-tier partnerships. The proposed regulations provide that
the premium allocated to the relevant partner is determined based on
the partnership agreement and section 704(b). Proposed Sec. 1.953-
3(b)(1)(iii)(C)(1). The Treasury Department and the IRS are also
considering whether, solely for purposes of determining the amount of
RPII, another method of allocating the premium payments should be
required under the authority provided in section 953(c)(8). One
potential method includes allocating the premium payments in proportion
to each partner's nonseparately stated share of partnership income or
loss. Comments are requested on whether this or another alternative
would be more appropriate.
The Treasury Department and the IRS request comments on the
appropriate application of aggregate principles to RPII. The Treasury
Department and the IRS also are considering revising forms and
instructions to facilitate information sharing and reporting between
RPII U.S. shareholders, RPII CFCs, and partnerships and request
comments in this regard.
2. Cross-Insurance Rule
The Treasury Department and IRS are aware of abusive marketed
offshore captive insurance arrangements that, notwithstanding the
directive in section 953(c)(8)(A) and legislative history described in
part IV.C of the Background section of this preamble and the 1991
proposed regulations, attempt to avoid the RPII rules through the use
of cross-insurance. Consistent with the Congressional directive, the
proposed regulations contain a special rule to address cross-insurance
arrangements, which replaces the cross-insurance rule contained in the
1991 proposed regulations. Proposed Sec. 1.953-3(b)(5) provides that
insurance income is treated as RPII if it is attributable to an
arrangement in which a RPII CFC insures a person that is not a related
insured and, as part of the same arrangement, another person insures a
related insured of the RPII CFC. This rule applies to direct or
indirect arrangements involving two or more insurance companies, and
also covers other arrangements with a similar degree of cooperative
risk sharing and applies regardless of whether the shareholders of each
RPII CFC are engaged in a similar line of business. Section 1.953-
3(b)(5) of the 1991 proposed regulations is withdrawn.
The Treasury Department and the IRS request comments with respect
to other parts of the 1991 proposed regulations relating to RPII,
including whether other parts should be reproposed, such as the
exception for indirect ownership through publicly traded corporations
under Sec. 1.953-3(b)(2)(iii) of the 1991 proposed regulations.
[[Page 3902]]
III. Net Investment Income Tax
As discussed in part V of the Background section of this preamble,
a domestic partnership or S corporation that directly or indirectly
(through one or more foreign entities) owns a CFC or QEF may make an
election under Sec. 1.1411-10(g) with respect to the CFC or QEF, and
certain persons that own a CFC or QEF indirectly through a domestic
partnership or S corporation may also make such an election, but only
if the domestic partnership or S corporation does not make the
election.
Consistent with the transition to aggregate treatment and
provisions in this rulemaking requiring QEF elections to be made (and
QEF inclusions to arise) at the partner or S corporation shareholder
level, the Treasury Department and the IRS have determined that
elections under Sec. 1.1411-10(g) should no longer be permitted to be
made by a domestic pass-through entity, but instead should be made only
by an individual, estate, or trust that holds the CFC or QEF indirectly
through the domestic pass-through entity. This rule permits the
election to be made solely by the person whose tax liability is
directly affected by the election. Accordingly, proposed Sec. 1.1411-
10(g)(3)(i) generally requires the election to be made by an
individual, estate, or trust that indirectly holds the relevant CFC or
QEF indirectly through a partnership or S corporation. However, for
taxable years that an S corporation elects to be treated as an entity
under proposed Sec. 1.958-1(e), the S corporation may make the
election under Sec. 1.1411-10(g) with respect to CFCs it owns,
directly or indirectly; if the S corporation does not make the election
under Sec. 1.1411-10(g), its shareholders that are individuals,
estates, or trusts may make it instead. Proposed Sec. 1.1411-
10(g)(3)(ii).
The proposed regulations also remove Sec. 1.1411-10(g)(2)(iii),
which provided rules applicable when a partnership terminated under
section 708(b)(1)(B), because section 708(b)(1)(B) was repealed as part
of the TCJA.
Finally, the Treasury Department and the IRS are considering
providing additional guidance (perhaps in the finalization of these
proposed regulations) under section 1411 on the calculation of net gain
for indirect shareholders when, for example, PFIC stock is sold by a
foreign partnership through which the indirect shareholder owns the
PFIC stock in a year after the indirect shareholder includes MTM gain.
Compare section 1296(b)(1)(A) (providing an increase to the basis of
PFIC stock held by a direct shareholder), with section 1296(b)(2)(A)
and proposed Sec. 1.1296-1(d)(2)(i) (providing, for purposes of
chapter 1 of the Code, an increase to the basis of PFIC stock
indirectly held). In light of this difference in wording, and the
placement of section 1411 in chapter 2A of the Code, the question
arises whether net gain under section 1411 could be overstated. But see
section 1411(c)(1)(A)(iii) and Sec. 1.1411-4(a)(1)(iii) (providing
that net investment income includes net gain attributable to the
disposition of property but only ``to the extent taken into account in
computing taxable income.'') Comments are requested on this issue.
IV. Applicability Dates
A. In General
The regulations under sections 964, 1291, 1293, 1295, 1296, 1298,
and 1411 and Sec. 1.958-1(d) are proposed to apply to taxable years
beginning on or after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
B. Entity Treatment of Certain Domestic Partnerships and S Corporations
With respect to the rules relating to domestic partnerships and S
corporations that applied the hybrid approach to determining section
951A inclusions contained in previously proposed Sec. 1.951A-5 (83 FR
51072, 51101-51104), proposed Sec. 1.951A-1(e)(2) is proposed to apply
to taxable years of foreign corporations ending before June 22, 2019,
and to taxable years of U.S. shareholders in which or with which such
taxable years end. Taxpayers may continue to rely on Notice 2019-46
until these regulations are finalized.
C. Elective Entity Treatment for Certain S Corporations
With respect to the rules relating to S corporations with AE&P,
proposed Sec. 1.958-1(e) is proposed to apply to taxable years of S
corporations ending on after September 1, 2020. However, taxpayers may
rely on proposed Sec. 1.958-1(e) for taxable years of S corporations
ending on or after June 22, 2019, and ending before September 1, 2020,
provided that the S corporation and its shareholders that are U.S.
shareholders consistently apply those rules with respect to all CFCs
whose stock the S corporation owns with the meaning of section 958(a).
D. RPII Provisions
The general RPII rules in proposed Sec. 1.953-3(b)(1) apply to
taxable years of foreign corporations beginning on or after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register, and to taxable years of United
States persons in which or with which such taxable years of foreign
corporations end.
The cross-insurance rule in proposed Sec. 1.953-3(b)(5) applies to
taxable years of foreign corporations ending on or after January 24,
2022, and to taxable years of United States persons in which or with
which such taxable years of foreign corporations end. As noted in part
IV.C of the Background section of this preamble, section 953(c)(8)(A)
and the legislative history refer to cross insurance in offshore
captive insurance arrangements as avoidance transactions, and the
legislative history states that deferral is not intended for such
cases. The applicability date of the final regulations is not intended
to address the effect of the statute and legislative history on
taxpayers who participated in cross-insurance arrangements in years
ending before January 24, 2022.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
These regulations are not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget (``OMB'') regarding review of tax regulations.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA'')
generally requires that a federal agency obtain the approval of the OMB
before collecting information from the public, whether such collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit.
The collections of information included in these proposed
regulations are in proposed Sec. 1.951A-1(e)(2)(iii); proposed Sec.
1.958-1(e)(1)(v) and (e)(2); proposed Sec. 1.964-1(c)(3)(ii) and
(iii); proposed Sec. 1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A); proposed
Sec. 1.1296-1(h)(1)(i) introductory text and (h)(1)(i)(B); and
proposed Sec. 1.1298-1(b)(1) and (2). The information in the
collections of information provided will generally be used by the IRS
for tax compliance purposes or by taxpayers to facilitate proper
reporting and compliance.
[[Page 3903]]
A. Collections of Information Under Existing Tax Forms
1. Collections of Information in Proposed Sec. 1.951A-1
The collections of information in proposed Sec. 1.951A-
1(e)(2)(iii) are required to be provided by domestic partnerships and S
corporations that elect to apply the rules in proposed Sec. 1.951A-5,
as contained in the 2018 proposed regulations (83 FR 51072, 51101-
51104), for taxable years ending before June 22, 2019. These
collections of information are satisfied by the domestic partnership or
S corporation attaching a statement to its return. In certain
instances, the domestic partnership or S corporation must also file
Form 8992, ``U.S. Shareholder Calculation of Global Intangible Low-
Taxed Income (GILTI),'' with its return and separately state each
partner's or shareholder's share of any distributions of E&P received
by the domestic partnership or S corporation that relate to the GILTI
inclusion amount reflected on its Schedules K-1, ``Partner's Share of
Income, Deductions, Credits, etc.'' or Schedules K-1, ``Shareholder's
Share of Income, Deductions, Credits, etc.,'' as applicable.
For purposes of the PRA, the reporting burden associated with the
collections of information in proposed Sec. 1.951A-1(e)(2)(iii) will
be reflected in the Paperwork Reduction Act Submissions associated with
Forms 1065 and 1120-S (OMB control number 1545-0123).
2. Collections of Information in Proposed Sec. 1.958-1
The collection of information in proposed Sec. 1.958-1(e)(2) is a
statement attached to Form 1120-S that identifies that the S
corporation and its shareholders (where applicable) are electing for
the S corporation to be treated as an entity for purposes of
determining who is subject to income inclusions under sections 951 and
951A for the first taxable year ending on or after September 1, 2020,
states the amount of the S corporation's AE&P, and is signed (where
applicable) by a person authorized to sign the S corporation's Form
1120-S. A similar collection of information is required for taxpayers
(certain S corporations and their shareholders) that elect for the S
corporation to be treated as an entity for purposes of sections 951 and
951A for taxable years ending before September 1, 2020, and after June
21, 2019.
For purposes of the PRA, the reporting burden associated with the
collection of information in proposed Sec. 1.958-1(e)(2) will be
reflected in the Paperwork Reduction Act Submissions associated with
Form 1120-S (OMB control number 1545-0123). Additionally, where an S
corporation and its shareholders elect for the S corporation to be
treated as an entity for taxable years ending before September 1, 2020,
and after June 21, 2019, the reporting burden associated with the
collection of information in proposed Sec. 1.958-1(e)(2) will be
reflected in the Paperwork Reduction Act Submissions associated with
Form 1120-S (OMB control number 1545-0123), the Form 1040 series (OMB
control number 1545-0074), and the Form 1041 series (OMB control number
1545-0092).
3. Collections of Information in Sec. 1.964-1 and Proposed Sec.
1.964-1
The collection of information in proposed Sec. 1.964-1(c)(3)(ii)
applies to taxpayers that are controlling domestic shareholders of
foreign corporations (as defined in Sec. 1.964-1(c)(5)) and that make
certain elections with respect to, or adopt or change methods of
accounting or taxable years for, the foreign corporations. This
collection of information is satisfied by the controlling domestic
shareholder filing a statement containing certain prescribed
information with its own tax return (or information return, if
applicable) for its taxable year in which or within which the affected
taxable year of the foreign corporation ends. The collection of
information in proposed Sec. 1.964-1(c)(3)(ii) applies to U.S.
shareholder partners (and not to U.S. shareholder partnerships) as a
result of proposed Sec. 1.958-1(d)(1).
The collection of information in proposed Sec. 1.964-1(c)(3)(iii)
requires controlling domestic shareholders of foreign corporations to
notify certain U.S. persons known to them of actions taken with respect
to the foreign corporation, such as certain tax elections and adoptions
of or changes to the foreign corporation's accounting methods or tax
years. Under proposed Sec. 1.964-1(c)(3)(iii)(A), this collection of
information is satisfied by the controlling domestic shareholder
providing notice to prescribed U.S. persons known to the controlling
domestic shareholder setting forth the name, country of organization,
and U.S. employer identification number (if applicable) of the foreign
corporation; providing the names, addresses, and stock interests of the
controlling domestic shareholders of the foreign corporation;
describing the nature of the action taken on behalf of the foreign
corporation and the taxable year for which the action was taken; and
identifying a designated shareholder that retains a jointly executed
consent confirming that such action has been approved by all of the
controlling domestic shareholders and containing the signature of a
principal officer of each such shareholder (or its common parent).
Proposed Sec. 1.964-1(c)(3)(iii)(B) provides that a controlling
domestic shareholder will be deemed to satisfy the general notice
requirement with respect to U.S. persons known to the controlling
domestic shareholder that own stock in the foreign corporation through
a domestic partnership by providing the notice containing the same
information to the partnership instead of to each U.S. person.
For purposes of the PRA, the reporting burden associated with the
collections of information in proposed Sec. 1.964-1(c)(3)(ii) and
(iii) will be reflected in the Paperwork Reduction Act Submissions
associated with the Forms for persons which can be considered
controlling domestic shareholders under the proposed regulations,
including individuals and certain domestic trusts, domestic estates,
domestic corporations, certain tax-exempt entities. Thus, the reporting
burden associated with these collections of information will be
reflected in the Paperwork Reduction Act Submissions associated with
the Form 990 series (OMB control number 1545-0047), the Form 1040
series (OMB control number 1545-0074), the Form 1041 series (OMB
control number 1545-0092), and the Form 1120 series (OMB control number
1545-0123).
4. Collections of Information in Proposed Sec. 1.1295-1
The collections of information in proposed Sec. 1.1295-
1(d)(2)(i)(A) and (d)(2)(ii)(A) apply to partners in partnerships and S
corporation shareholders that make QEF elections with respect to a PFIC
held through a partnership or S corporation. The collections of
information in these sections are satisfied, in part, by the partners
and S corporation shareholders filing Form 8621 to make the QEF
election. For purposes of the PRA, the reporting burden associated with
the collection of information in the Form 8621 will be reflected in the
Paperwork Reduction Act Submissions associated with Form 8621 (OMB
control number 1545-1002).
5. Collection of Information in Proposed Sec. 1.1296-1
The collections of information in proposed Sec. 1.1296-1(h)(1)(i)
apply to partners in partnerships and S corporation shareholders that
make MTM elections with respect to PFICs
[[Page 3904]]
held through a partnership or S corporation. These collections of
information are satisfied, in part, by the partners and S corporation
shareholders filing Form 8621 to make the MTM election. For purposes of
the PRA, the reporting burden associated with the collections of
information in the Form 8621 will be reflected in the Paperwork
Reduction Act Submissions associated with Form 8621 (OMB control number
1545-1002).
6. Collections of Information in Proposed Sec. 1.1298-1
The collections of information in proposed Sec. 1.1298-1(b)(1)
apply to partners in partnerships and S corporation shareholders that
own PFICs indirectly through partnerships and S corporations with
respect to which they are required to file an annual report in their
capacity as PFIC shareholders, as defined in proposed Sec. 1.1291-
1(b)(7). The collections of information in proposed Sec. 1.1298-
1(b)(2) apply to certain beneficiaries of domestic estates and domestic
nongrantor trusts that own PFICs indirectly through the domestic estate
or domestic nongrantor trust. These collections of information are
satisfied by annually filing Form 8621. For purposes of the PRA, the
reporting burden associated with the collections of information in the
Form 8621 will be reflected in the Paperwork Reduction Act Submissions
associated with Form 8621 (OMB control number 1545-1002).
7. Estimated Number of Respondents
The following table displays the number of respondents estimated to
be required to satisfy the collections of information described in this
part II.A of the Special Analysis. The ranges in the following table
may be overstated in some cases for various reasons, including
overcounting domestic partnerships or S corporations that are
themselves partners in domestic partnerships and overestimating the
number of taxpayers who will make an election or take a relevant
action.
Tax Forms Impacted
----------------------------------------------------------------------------------------------------------------
Number of respondents Forms to which the information may be
Collection of information (estimated) attached
----------------------------------------------------------------------------------------------------------------
Proposed Sec. 1.951A-1(e) (2)(iii): 0-7,000.................... Form 1065.
Election for domestic partnerships to
apply the hybrid approach in proposed
Sec. 1.951A-5 of the 2018 proposed
regulations.
Proposed Sec. 1.951A-1(e)(2)(iii): 0-4,000.................... Form 1120-S.
Election for S corporations to apply
the hybrid approach in proposed Sec.
1.951A-5 of the 2018 proposed
regulations.
Proposed Sec. 1.958-1(e)(2): Election 2,300-4,300................ Form 1120-S.
for S corporations with AE&P to apply Form 1040 series.
entity treatment for purposes of Form 1041 series.
sections 951 and 951A.
Proposed Sec. 1.964-1(c)(3)(ii) and 6,600-7,000................ Form 990 series.
(iii): Statement attached to tax return Form 1040 series.
of controlling domestic shareholders of Form 1041 series.
certain foreign corporations and Form 1120 series.
notification to certain other U.S.
persons.
Proposed Sec. 1.1295-1(d)(2)(i)(A): 1,200,000-1,400,000........ Form 8621.
QEF election made by partner that
indirectly owns stock of a PFIC through
a partnership.
Proposed Sec. 1.1295-1(d)(2)(ii)(A): 2,000...................... Form 8621.
QEF election made by shareholder of an
S corporation that indirectly owns
stock of a PFIC through the S
corporation.
Proposed Sec. 1.1296-1(h)(1)(i): MTM 75,000-200,000............. Form 8621.
election made by partner that
indirectly owns stock of a PFIC through
a partnership.
Proposed Sec. 1.1296-1(h)(1)(i): MTM 200-300.................... Form 8621.
election made by shareholder of an S
corporation that indirectly owns stock
of a PFIC through the S corporation.
Proposed Sec. 1.1298-1(b)(1): Annual 1,250,000-1,500,000........ Form 8621.
report for partners that indirectly own
stock of a PFIC through a partnership.
Proposed Sec. 1.1298-1(b)(1): Annual 2,300-2,500................ Form 8621.
report for shareholders of S
corporations that indirectly own stock
of a PFIC through the S corporation.
Proposed Sec. 1.1298-1(b)(2): Annual 5,000...................... Form 8621.
report for certain beneficiaries of
domestic estates or domestic grantor
trusts that indirectly own stock of a
PFIC through the estate or grantor
trust.
----------------------------------------------------------------------------------------------------------------
Source: Research, Applied Analytics and Statistics division (RAAS) (IRS), Compliance Data Warehouse (CDW) (IRS).
8. Status of PRA Submissions
The current status of the PRA submissions related to the tax forms
on which reporting under these regulations will be required is
summarized in the following table. The burdens associated with the
information collections in the forms are included in aggregated burden
estimates for the OMB control numbers 1545-0047 (which represents a
total estimated burden time for all forms and schedules for tax-exempt
entities of 50.5 million hours and total estimated monetized costs of
$3.59 billion ($2018)), 1545-0074 (which represents a total estimated
burden time for all forms and schedules for individuals of 1.784
billion hours and total estimated monetized costs of $31.764 billion
($2017)), 1545-0092 (which represents a total estimated burden time for
all forms and schedules for trusts and estates of 307.8 million hours
and total estimated monetized costs of $9.95 billion ($2016)), and
1545-0123 (which represents a total estimated burden time for all forms
and schedules for corporations of 3.157 billion hours and total
estimated monetized costs of $58.148 billion ($2017)). The burden
estimates provided in the OMB control numbers in the following table
are aggregate amounts that relate to the entire package of forms
associated with the OMB control number and will in the future include,
but not isolate, the estimated burden of the tax forms that will be
revised as a result of the information collections in these proposed
regulations. These numbers are therefore unrelated to the future
calculations needed to assess the burden imposed by these proposed
regulations. To guard against over-counting the burden that
international tax provisions imposed prior to the Act, the Treasury
Department and the IRS urge readers to recognize that these burden
estimates have also been cited by regulations (such as the foreign tax
credit regulations, 84 FR 69022) that rely on the applicable OMB
control numbers in order to collect information from the applicable
types of filers.
[[Page 3905]]
In 2018, the IRS released and invited comment on drafts of Forms
990-PF (Return of Private Foundation or Section 4947(a)(1) Trust
Treated as Private Foundation), 990-T (Exempt Organization Business
Income Tax Return), 1040 (U.S. Individual Income Tax Return), (U.S.
Income Tax Return for Estates and Trusts), 1065 (U.S. Return of
Partnership Income), 1120 (U.S. Corporation Income Tax Return), and
8621 (Return by a Shareholder of a Passive Foreign Investment Company
or Qualified Electing Fund). The IRS received comments only regarding
Forms 1040, 1065, and 1120 during the comment period. After reviewing
all such comments, the IRS made the forms available on December 21,
2018, for use by the public.
No burden estimates specific to the forms affected by the proposed
regulations are currently available. The Treasury Department and the
IRS have not estimated the burden, including that of any new
information collections, related to the requirements under the proposed
regulations. The Treasury Department and the IRS request comments on
all aspects of information collection burdens related to the proposed
regulations, including estimates for how much time it would take to
comply with the paperwork burdens for each relevant form and ways for
the IRS to minimize the paperwork burden. In addition, drafts of IRS
forms are posted for public review at <a href="https://apps.irs.gov/app/picklist/list/draftTaxForms.htm">https://apps.irs.gov/app/picklist/list/draftTaxForms.htm</a>. Comments on these forms can be
submitted at <a href="https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications">https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications</a>. These forms will not be finalized until after they have
been approved by OMB under the PRA.
B. Collections of Information for Which New OMB Control Numbers Are
Being Requested
1. Collection of Information in Proposed Sec. 1.958-1
The collection of information in proposed Sec. 1.958-1(e)(1)(v) is
required for certain S corporations to make valid elections under
proposed Sec. 1.958-1(e)(1)(i) to apply entity treatment for purposes
of determining income inclusions under sections 951 and 951A. This
collection of information is satisfied by the S corporation maintaining
sufficient records to support the determination of its AE&P amount.
Estimated annual reporting burden: 213.
Estimated total annual monetized cost burden: $20,188.
Estimated average annual burden hours per respondent: 0.5.
Estimated number of respondents: 425.
Estimated annual frequency of responses: Once.
2. Collections of Information in Proposed Sec. 1.1295-1
Part of the collection of information in proposed Sec. 1.1295-
1(d)(2)(i)(A) is for a partner to notify the partnership that the
partner has made a QEF election with respect to a PFIC it owns
indirectly through the partnership. This collection of information is
satisfied by the partner notifying the partnership of the election no
later than 30 days after filing the return with which the election is
made. The partner may notify the partnership in any reasonable manner.
Estimated annual reporting burden: 650,000.
Estimated total annual monetized cost burden: $61,750,000.
Estimated average annual burden hours per respondent: 0.5.
Estimated number of respondents: 1,300,000.
Estimated annual frequency of responses: One-time election.
Part of the collection of information in proposed Sec. 1.1295-
1(d)(2)(ii)(A) is for an S corporation shareholder to notify the S
corporation that the shareholder has made a QEF election with respect
to a PFIC it owns indirectly through the S corporation. This collection
of information is satisfied by the shareholder notifying the S
corporation of the election no later than 30 days after filing the
return with which the election is made. The shareholder may notify the
S corporation in any reasonable manner.
Estimated annual reporting burden: 1,000.
Estimated total annual monetized cost burden: $95,000.
Estimated average annual burden hours per respondent: 0.5.
Estimated number of respondents: 2,000.
Estimated annual frequency of responses: One-time election.
3. Collection of Information in Proposed Sec. 1.1296-1
The collection of information in proposed Sec. 1.1296-
1(h)(1)(i)(B) is for a partner or an S corporation shareholder to
notify the partnership or S corporation, respectively, that the partner
or shareholder has made an MTM election with respect to a PFIC it owns
indirectly through the partnership or S corporation. This collection of
information is satisfied by the partner or shareholder notifying the
partnership or S corporation of the election no later than 30 days
after filing the return with which the election is made. The partner or
shareholder may notify the partnership or S corporation in any
reasonable manner.
Estimated annual reporting burden: 35,500.
Estimated total annual monetized cost burden: $3,372,500.
Estimated average annual burden hours per respondent: 0.5.
Estimated number of respondents: 71,000.
Estimated annual frequency of responses: One-time election.
4. Submission to OMB and Request for Comments
The collections of information contained in proposed Sec. Sec.
1.958-1(e)(1)(v); 1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A); and 1.1296-
1(h)(1)(i)(B) are either general recordkeeping or notice requirements
and cannot be associated with existing OMB control numbers. These
collections of information will be submitted to the Office of
Management and Budget for review and, if approved, assigned new OMB
control numbers in accordance with the PRA. Comments on the collections
of information should be sent to the Office of Management and Budget,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503, with copies
to the Internal Revenue Service, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the collection of
information should be received by March 28, 2022. Comments are
specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the duties of the IRS, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information for the
collections discussed in part II.B of this Special Analyses.
[[Page 3906]]
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that the proposed regulations would not have a
significant economic impact on a substantial number of small entities
within the meaning of section 601(6) of the Regulatory Flexibility Act
(``small entities'').
The Small Business Administration establishes small business size
standards (13 CFR part 121) by annual receipts or number of employees.
There are several industries that may be identified as small even
through their annual receipts are above $25 million or because of the
number of employees. The Treasury Department and the IRS do not have
data indicating the number of small entities that will be significantly
impacted by the proposed regulations. Nevertheless, regardless of the
number of small entities potentially impacted, the Treasury Department
and the IRS have concluded that the proposed regulations will not have
a significant economic impact on small entities.
First, the proposed regulations provide guidance with respect to
domestic partnerships under the PFIC regime, which generally affects
U.S. taxpayers that have ownership interests in certain foreign
corporations that are not CFCs. To the extent that a foreign entity
might be considered a small entity for purposes of the Regulatory
Flexibility Act (because it has a place of business in the United
States and makes a significant contribution to the U.S. economy, for
example), because the proposed regulations would not affect foreign
partnerships, foreign partners of the affected domestic partnerships,
or the PFIC itself, there would be no economic impact on those foreign
entities. Therefore, a small entity generally would not be affected by
the proposed regulations unless it is a U.S. taxpayer that has an
ownership interest in a foreign corporation. For purposes of the
Regulatory Flexibility Act, natural persons are not considered small
entities.
Although data on U.S. businesses that invest in a PFIC is limited,
data available to the IRS shows that individuals (Form 1040 filers)
make up approximately 70 percent of those who report PFIC income while
U.S. businesses of all sizes make up approximately 20 percent of Form
8621 filers. To estimate the magnitude of the taxes currently collected
as a result of U.S. businesses investing in PFICs, the Treasury
Department and the IRS calculated the ratio of PFIC regime tax to
(gross) total income for 2013 through 2018 for corporations that filed
Form 1120 (``C corporations'') with a Form 8621 attached. Total income
was determined by matching each C corporation filing Form 8621 to its
Form 1120. Ordinary QEF income, QEF capital gains, and MTM income were
assumed to be taxed at 35 percent (21 percent for 2018), and the
section 1291 tax and interest charge tax were included as reported.
Only those corporations where a match was found and that had positive
total income were included in the analysis. For the approximately 150
to 300 C corporations for which a match was available in a given year,
the average annual ratio of the calculated tax to total income was
never greater than 0.00035 percent. For the approximately 60 to 200 C
corporations per year with $25 million or less for which a match was
available, the average annual ratio was never greater than 1.068
percent.
--------------------------------------------------------------------------------------------------------------------------------------------------------
2013 ($ millions) 2014 ($ millions) 2015 ($ millions) 2016 ($ millions) 2017 ($ millions) 2018 ($ millions)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All C corporations
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax................................... 5 12 14 8 22 42
Total Income.......................... 4,204,795 10,154,520 19,935,845 20,076,876 21,625,159 13,317,244
Tax to Total Income................... 0.000% 0.000% 0.000% 0.000% 0.000% 0.000%
--------------------------------------------------------------------------------------------------------------------------------------------------------
C corporations with total income of $25 million or less
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax................................... (*) (*) 4 4 5 3
Total Income.......................... 463 563 627 573 460 741
Tax to Total Income................... 0.060% 0.014% 0.576% 0.689% 1.068% 0.400%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: RAAS, CDW. * indicates less than $1 million.
Thus, even if the economic impact of the proposed regulations is
interpreted broadly to include the tax liability due under the PFIC
regime, which small entities would be required to pay even if the
proposed regulations were not issued, the tax-related economic impact
should not be regarded as significant under the Regulatory Flexibility
Act.
A portion of the economic impact of the proposed regulations
derives from the administration of the new rules and the collection of
information requirements imposed by the PFIC-related provisions in
proposed Sec. Sec. 1.1295-1(d)(2)(i)(A) and (d)(2)(ii)(A), 1.1296-
1(h)(1)(i), and 1.1298-1(b)(1) and (2). For the collections of
information in proposed Sec. Sec. 1.1295-1(d)(2)(i)(A) and
(d)(2)(ii)(A) and 1.1296-1(h)(1)(i), the Treasury Department and the
IRS have determined that the average burden is approximately half an
hour per response. The IRS's Research, Applied Analytics, and
Statistics division estimates that the appropriate wage rate for this
set of taxpayers is $95 per hour. Thus, the annual burden per taxpayer
from the collection of information requirement for each of these
provisions is approximately $48. Additionally, these requirements apply
only if a taxpayer chooses to make an election. For the collections of
information in proposed Sec. 1.1298-1(b)(1) and (2), the Treasury
Department and the IRS have determined that the average burden is
approximately 49 hours per response. The IRS's Research, Applied
Analytics, and Statistics division estimates that the appropriate wage
rate for this set of taxpayers is $95 per hour. Thus, the annual burden
per taxpayer from the collection of information requirement in this
provision is approximately $4,655. This requirement applies to
taxpayers required to file Form 8621 with respect to a PFIC. In each
case, the compliance burden associated with the PFIC-related provisions
in the proposed regulations is generally shifted from the entity level
to the owner level. For example, under proposed Sec. Sec. 1.1295-
1(d)(2)(i)(A) and 1.1298-1(b)(1), a domestic partnership no longer
makes a QEF election with respect to, and no longer files Form
[[Page 3907]]
8621 for, PFICs it owns; rather, the election and associated Form 8621
will be made and filed, respectively, by the partners. While this shift
could result in some duplication of the overall compliance burden
associated with the PFIC-related provisions in the proposed
regulations, the Treasury Department and the IRS do not believe this
shift should have a significant economic impact on taxpayers.
Additionally, the proposed regulations provide guidance with
respect to several statutory provisions within subpart F, which
generally affect U.S. shareholders of CFCs. To estimate the magnitude
of the tax impact of these provisions on small entities, the Treasury
Department and the IRS examined the gross receipts of all taxpayers
that e-filed Forms 5471 as a Category 4 or 5 filer for 2015 and 2016,
which amounted to approximately 25,000 to 35,000 taxpayers in each
year. The Treasury Department and the IRS then determined the tax
revenue generated from the approximately 25,000 to 35,000 taxpayers'
section 951A inclusions \4\ estimated by the Joint Committee on
Taxation for businesses of all sizes is less than 0.3 percent of gross
receipts, as shown in the table that follows. Based on data for 2015
and 2016, total gross receipts for all businesses with gross receipts
under $25 million is $60 billion while those over $25 million is $49.1
trillion. Given that tax on section 951A inclusions is generally
correlated with gross receipts, this results in businesses with less
than $25 million in gross receipts accounting for approximately 0.01
percent of the tax revenue. Additionally, although data are generally
not readily available to determine the sectoral breakdown of these
entities, the number of domestic partnerships and S corporations
subject to these provisions under the proposed regulations should make
up only a portion of the totals. For example, the Treasury Department
and the IRS estimate that there were approximately 7,000 domestic
partnerships that e-filed at least one Form 5471 as a Category 4 or 5
filer in each of 2015 and 2016, amounting to 28 percent of the low-end
estimate of all taxpayers filing Form 5471 as a Category 4 or 5 filer
and 20 percent of the high-end estimate. Based on this analysis, the
proposed regulations do not impose a significant economic impact on
smaller businesses, in particular domestic partnerships and S
corporations.
---------------------------------------------------------------------------
\4\ The Treasury Department and the IRS determined that using
section 951A inclusions, rather than section 951 inclusions, would
serve as a better indication of the potential tax impact of the
proposed regulations on small entities that own CFCs because the
base upon which a U.S. shareholder's section 951A inclusion is
computed (a CFC's gross income--with certain exceptions--less
allocable deductions) is generally broader than the base upon which
its section 951 inclusion is computed (a CFC's income from specified
transactions).
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation 7.7 billion....... 12.5 billion...... 9.6 billion....... 9.5 billion....... 9.3 billion....... 9.0 billion....... 9.2 billion....... 9.3 billion....... 15.1 billion...... 21.2 billion.
(JCT) tax revenue.
Total gross receipts............ 30727 billion..... 53870 billion..... 566676 billion.... 59644 billion..... 62684 billion..... 65865 billion..... 69201 billion..... 72710 billion..... 76348 billion..... 80094 billion.
Percent......................... 0.03.............. 0.02.............. 0.02.............. 0.02.............. 0.01.............. 0.01.............. 0.01.............. 0.01.............. 0.02.............. 0.03.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Research, Applied Analytics and Statistics division (IRS), Compliance Data Warehouse (IRS) (E-filed Form 5471, category 4 or 5, C and S corporations and partnerships); Conference Report, at 689.
Thus, even if the economic impact of the proposed regulations is
interpreted broadly to include the tax liability due under subpart F,
which small entities would be required to pay even if the proposed
regulations were not issued, the tax-related economic impact should not
be regarded as significant under the Regulatory Flexibility Act.
A portion of the economic impact of the proposed regulations
derives from the collection of information requirements imposed by the
provisions related to CFCs and other types of foreign corporations in
proposed Sec. 1.951A-1(e)(2)(iii), proposed Sec. 1.958-1(e)(1)(v) and
(e)(2), and proposed Sec. 1.964-1(c)(3)(ii) and (iii). The Treasury
Department and the IRS have determined that the average burden for each
of these provisions is approximately half an hour per response. The
IRS's Research, Applied Analytics, and Statistics division estimates
that the appropriate wage rate for this set of taxpayers is $95 per
hour. Thus, the annual burden per taxpayer from the collection of
information requirement for each of these provisions is approximately
$48. These requirements apply only if a taxpayer chooses to make an
election with respect to the CFC or other foreign corporation. In the
case of proposed Sec. 1.964-1(c)(3)(ii) and (iii), the compliance
burden is generally shifted from the U.S. shareholder partnership level
to its U.S. shareholder partners. While this shift could result in some
duplication of the overall compliance burden associated with these
provisions, the Treasury Department and the IRS do not believe this
shift should result in a significant economic impact on taxpayers.
Accordingly, it is hereby certified that the proposed regulations
would not have a significant economic impact on a substantial number of
small entities.
IV. Section 7805(f)
Pursuant to section 7805(f), the proposed regulations have been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small businesses. The
Treasury Department and the IRS also request comments from the public
on the analysis in part III of the Special Analyses.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by state, local, or tribal governments, or by
the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications and do not impose substantial direct
compliance
[[Page 3908]]
costs on state and local governments or preempt state law within the
meaning of the Executive order.
Comments and Requests for Public Hearing
Before the proposed amendments are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES section.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations. See also parts I.B.1 and I.C.1 of the
Explanation of Provisions requesting comments related to the
possibility of delegating authority to domestic partnerships and S
corporations to make QEF and MTM elections on behalf of their owners;
part II.D of the Explanation of Provisions requesting comments on (i)
whether a U.S. person holding an option to acquire stock (or other non-
stock interest) in a RPII CFC should be treated as a related insured,
(ii) the allocation of premium payments made by a partnership, (iii)
the general application of aggregate principles to RPII, (iv) necessary
revisions to forms and instructions to facilitate information sharing
and reporting for RPII purposes, and (v) other parts of the 1991
proposed regulations relating to RPII, including whether other parts
should be reproposed (such as the exception for indirect ownership
through publicly traded corporations); and part III of the Explanation
of Provisions requesting comments on the calculation of indirect
shareholders' net gain for purposes of section 1411. Any electronic
comments submitted, and to the extent practicable any paper comments
submitted, will be made available at <a href="http://www.regulations.gov">www.regulations.gov</a> or upon
request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal authors of these regulations are Edward Tracy,
Raphael Cohen, and Josephine Firehock of the Office of Associate Chief
Counsel (International), and Caroline E. Hay and Jennifer N. Keeney of
the Office of Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the Treasury Department and
the IRS participated in their development.
Statement of Availability of IRS Documents
IRS Revenue Procedures, Revenue Rulings, Notices, and other
guidance cited in this document are published in the Internal Revenue
Bulletin or Cumulative Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="http://www.irs.gov">www.irs.gov</a>.
Partial Withdrawal of Proposed Regulations
Under the authority of 26 U.S.C. 7805, proposed Sec. 1.953-3(b)(1)
and (5) contained in the notice of proposed rulemaking that was
published in the Federal Register on April 17, 1991 (56 FR 15540), is
withdrawn.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1.The authority citation for part 1 is amended by:
0
1. Adding a sectional authority for Sec. 1.953-3 in numerical order;
0
2. Revising the sectional authorities for Sec. Sec. 1.1293-1, 1.1295-
1, and 1.1296-1;
0
3. Adding sectional authorities for Sec. Sec. 1.1297-0 and 1.1297-3 in
numerical order;
0
4. Arranging the sectional authority for Sec. 1.1298-1 in numerical
order and revising the authority; and
0
5. Adding a sectional authority for Sec. 1.1298-3 in numerical order.
The additions and revisions read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.953-3 also issued under 26 U.S.C. 953(c)(8).
* * * * *
Section 1.1293-1 also issued under 26 U.S.C. 1298(g).
* * * * *
Section 1.1295-1 also issued under 26 U.S.C. 1295(b)(2) and
1298(g).
* * * * *
Section 1.1296-1 also issued under 26 U.S.C. 1298(a)(1)(B) and
(g).
* * * * *
Section 1.1297-0 also issued under 26 U.S.C. 1298(g).
* * * * *
Section 1.1297-3 also issued under 26 U.S.C. 1298(g).
* * * * *
Section 1.1298-1 also issued under 26 U.S.C. 1298(f) and (g).
* * * * *
Section 1.1298-3 also issued under 26 U.S.C. 1298(g).
* * * * *
0
Par. 2. Section 1.951A-1 is amended by revising paragraph (e) to read
as follows:
Sec. 1.951A-1 General provisions.
* * * * *
(e) Stock owned through domestic partnerships and S corporations--
(1) Cross-references. See Sec. 1.958-1(d) for rules regarding the
ownership of stock of a foreign corporation through a domestic
partnership (or S corporation, as defined in section 1361(a)(1), by
reason of section 1373(a)) for purposes of section 951A and for
purposes of any provision that specifically applies by reference to
section 951A or the section 951A regulations. See Sec. 1.958-1(e) for
rules regarding an election for certain S corporations to be treated as
an entity for purposes of section 951A and the section 951A
regulations.
(2) Application of entity treatment for taxable years ending before
June 22, 2019--(i) General rule. If a domestic partnership or S
corporation satisfies the notification and reporting requirements in
paragraph (e)(2)(iii) of this section, the domestic partnership or S
corporation may apply the rules in proposed Sec. 1.951A-5 as if the
amendments proposed on October 10, 2018, had been finalized in their
entirety (proposed GILTI rules), for taxable years ending before June
22, 2019.
(ii) Inapplicability of penalties. If a domestic partnership or S
corporation satisfies the requirements of paragraph (e)(2)(iii) of this
section, penalties for failures described in sections 6698(a), 6699(a),
6722(a), or any similar provision will not apply to the domestic
partnership or S corporation to the extent such failures arise from
acting consistently with the proposed GILTI rules before June 22, 2019.
(iii) Notification and reporting requirements--(A) Notification. To
be eligible for the rules described in paragraphs (e)(2)(i) and (ii) of
this section, a domestic partnership or S corporation must provide the
notification described in paragraphs (e)(2)(iii)(A)(1) through (3) of
this section to each partner of the
[[Page 3909]]
partnership or shareholder of the S corporation. Such notification must
be provided no later than the due date (taking into account extensions,
if any, or any additional time that would have been granted if the
domestic partnership or S corporation had made an extension request) of
the domestic partnership's or S corporation's tax return for the last
taxable year ending before June 22, 2019, and may be provided through
any reasonable method, including via mail, email, or posting on a
website through which the domestic partnership or S corporation would
ordinarily disseminate tax information to its partners or shareholders.
The domestic partnership or S corporation must also attach the
notification described in this paragraph (e)(2)(iii)(A) and Form 8992,
``U.S. Shareholder Calculation of Global Intangible Low-Taxed Income
(GILTI),'' reflecting computations under the proposed GILTI rules to
any tax return with respect to which the rules described in paragraph
(e)(2)(i) or (ii) of this section are being applied if the tax return
has not been filed as of September 9, 2019. The notification required
under this paragraph (e)(2)(iii) must provide--
(1) That the Schedule K-1, ``Partner's Share of Income, Deductions,
Credits, etc.,'' or the Schedule K-1, ``Shareholder's Share of Income,
Deductions, Credits, etc.,'' provided to the partner or shareholder,
respectively, is consistent with the proposed GILTI rules;
(2) Whether the domestic partnership or S corporation filed a Form
1065, ``U.S. Return of Partnership Income,'' or Form 1120-S, ``U.S.
Income Tax Return for an S Corporation,'' consistent with the proposed
GILTI rules or this paragraph (e); and
(3) That the notification is provided in accordance with Notice
2019-46, 2019-37 I.R.B. 695.
(B) Schedule K-1 distribution reporting. If a domestic partnership
or S corporation furnished a Schedule K-1 based on the proposed GILTI
rules, the domestic partnership or S corporation must separately state
on Schedules K-1 for subsequent taxable years the partner's or
shareholder's distributive share or pro rata share of a foreign
corporation's distributions to the domestic partnership or S
corporation of earnings and profits that relate to the GILTI inclusion
amount of the partnership or S corporation that was reflected on the
initially provided Schedules K-1. This information must be provided for
each taxable year of the domestic partnership or S corporation
following the taxable year to which the first Schedule K-1 relates.
* * * * *
0
Par. 3. Section 1.951A-7 is amended by adding paragraph (e) to read as
follows:
Sec. 1.951A-7 Applicability dates.
* * * * *
(e) Entity treatment of domestic partnerships and S corporations.
Section 1.951A-1(e)(2) applies to taxable years of foreign corporations
ending before June 22, 2019, and to taxable years of United States
shareholders in which or with which such taxable years end.
0
Par. 4. Section 1.953-3 is revised to read as follows:
Sec. 1.953-3 Related person insurance income.
(a) [Reserved]
(b) Related person insurance income--(1) Definition of related
person insurance income--(i) In general. Insurance income under section
953(a) includes related person insurance income under section
953(c)(2). Related person insurance income is premium and investment
income attributable to an annuity, insurance, or reinsurance policy
that directly or indirectly provides coverage to a related insured as
defined in paragraph (b)(1)(ii) of this section. For purposes of this
section, the terms United States shareholder and controlled foreign
corporation have the meaning provided in section 953(c)(1).
(ii) Related insured. Except as provided in paragraph (b)(5)(ii) of
this section, with respect to a foreign corporation, a related insured
means any of the following--
(A) A United States shareholder of the foreign corporation;
(B) A person that is related to a United States shareholder within
the meaning of section 953(c)(6);
(C) A pass-through entity, if a related insured (other than a pass-
through entity) owns stock in the foreign corporation indirectly
(within the meaning of section 958(a)) through the pass-through entity;
or
(D) A person (other than a publicly traded corporation or publicly
traded partnership) that is more than 50 percent owned by United States
shareholders of the foreign corporation as described in paragraph
(b)(1)(v) of this section.
(iii) Amount treated as related person insurance income with
respect to a pass-through entity--(A) In general. In the case of a
pass-through entity that is a related insured, the amount treated as
related person insurance income is equal to the insurance income
attributable to the policy that directly or indirectly provides
coverage to the pass-through entity multiplied by the fraction
described in paragraph (b)(1)(iii)(B) of this section.
(B) Fraction. The fraction described in this paragraph
(b)(1)(iii)(B) is equal to--
(1) The total amount of premiums paid or accrued by the pass-
through entity for the policy that is allocated (directly or
indirectly, through one or more pass-through entities) to all related
insureds (other than pass-through entities); divided by
(2) The total amount of premiums paid or accrued by the pass-
through entity for the policy.
(C) Allocation--(1) Partnerships. For purposes of paragraph
(b)(1)(iii)(B) of this section, the total amount of premiums paid or
accrued by a partnership that is allocated to the related insureds is
determined in accordance with the partnership agreement and section
704(b).
(2) S corporations. For purposes of paragraph (b)(1)(iii)(B) of
this section, the total amount of premiums paid or accrued by an S
corporation that is allocated to the related insureds is determined on
a pro rata basis.
(iv) Pass-through entities. For purposes of paragraph (b)(1) of
this section, a pass-through entity is an S corporation or a domestic
or foreign partnership (other than a publicly traded partnership).
(v) Ownership. The ownership threshold described in paragraph
(b)(1)(ii)(D) of this section is met if United States shareholders
collectively own (after applying the principles of section 958(a) and
(b)) more than 50 percent of the stock in a corporation (by vote or
value), more than 50 percent of the capital or profits interests in a
partnership, or more than 50 percent of the interests in a trust or
estate.
(vi) Stock owned through domestic partnerships or S corporations.
See Sec. 1.958-1(d) for rules regarding the ownership of stock of a
foreign corporation through a domestic partnership or S corporation for
purposes of section 953(c) and for purposes of any provision that
specifically applies by reference to section 953(c) or the regulations
in this part under section 953 that relate to section 953(c).
(vii) Examples. The following examples illustrate the rules of
paragraph (b)(1) of this section.
(A) Example 1--(1) Facts. FC is a foreign corporation engaged in
the insurance business. FC is wholly owned by FP, a foreign
partnership. DC, a domestic corporation, owns 25% of the interests in
FP. The remaining interests
[[Page 3910]]
in FP are held by unrelated foreign corporations. Under the partnership
agreement, all items of income, gain, loss, deduction, and credit are
allocated 25% to DC and 75% to the other partners. In Year 1, FC issues
the FP policy, under which FP is insured. FP pays a premium of $80 for
the FP policy. The insurance income attributable to the FP policy
(including both premium and investment income) is $100. FC earns an
additional $1,000 of income that is treated as related person insurance
income. Under section 704(b), DC would be allocated $20 (25%) of the
premium paid or accrued by FP.
(2) Result. Under paragraph (b)(1)(ii)(C) of this section, FP is
treated as a related insured with respect to FC because it is a pass-
through entity through which DC indirectly owns stock in FC. Therefore,
under paragraph (b)(1)(i) of this section, a portion of the insurance
income attributable to the FP policy is treated as related person
insurance income. Under paragraph (b)(1)(iii)(A) of this section, the
amount of related person insurance income with respect to FP is equal
to the insurance income attributable to the FP policy ($100) multiplied
by the fraction described in paragraph (b)(1)(iii)(B) of this section.
That fraction is equal to the portion of the premium paid by FP that is
allocable to DC ($20) divided by the total premium paid by FP ($80), or
25%. Therefore, FC has $25 of related person insurance income under
section 953(c)(2) attributable to the FP policy in Year 1.
(B) Example 2--(1) Facts. FC is a foreign corporation engaged in
the insurance business. Two domestic corporations, DC1 and DC2, each
own 50% of the stock of FC. In addition, DC1 and DC2 each own 50% of
the stock in DC3, a domestic corporation. In Year 1, FC issues the DC3
policy, under which DC3 is insured. The insurance income attributable
to the DC3 policy is $100. FC earns an additional $1,000 of income that
is treated as related person insurance income.
(2) Result. DC3 meets the requirements of paragraph (b)(1)(v) of
this section because United States shareholders of FC (DC1 and DC2)
collectively own all the stock of DC3. Therefore, under paragraph
(b)(1)(ii)(D) of this section, DC3 is treated as a related insured with
respect to FC. Consequently, under paragraph (b)(1)(i) of this section,
all of FC's $100 of insurance income attributable to the DC3 policy is
treated as related person insurance income under section 953(c)(2).
(2) through (4) [Reserved]
(5) Cross-insurance arrangements--(i) In general. Related person
insurance income includes insurance income attributable to an
arrangement (or a substantially similar arrangement with a similar
degree of cooperative risk sharing) whereby a foreign corporation
issues an insurance, reinsurance, or annuity contract to a person other
than a related insured and, as part of the arrangement (involving one
or more other persons), another person issues an insurance,
reinsurance, or annuity contract to a related insured of the foreign
corporation.
(ii) Related insured. For purposes of applying paragraph (b)(5)(i)
of this section before the applicability date described in paragraph
(c)(1) of this section, the term related insured means, with respect to
a foreign corporation, a United States shareholder of the foreign
corporation or a person that is related to a United States shareholder
within the meaning of section 953(c)(6).
(iii) Example. Controlled foreign corporation X is owned by 30
unrelated United States shareholders. Controlled foreign corporation Y
is owned by 30 unrelated United States shareholders (that is, unrelated
to X and Y and the shareholders of X and Y). X agrees to provide
insurance protection to Y's shareholders, and Y agrees to provide
insurance to X's shareholders. The insurance income of both X and Y
that is attributable to insuring the shareholders of the other
corporation constitutes related person insurance income.
(c) Applicability date--(1) In general. Paragraph (b)(1) of this
section applies to taxable years of foreign corporations beginning on
or after [date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register], and to taxable
years of United States persons in which or with which such taxable
years of foreign corporations end.
(2) Cross-insurance rule. Paragraph (b)(5) of this section applies
to taxable years of foreign corporations ending on or after January 24,
2022, and to taxable years of United States persons in which or with
which such taxable years of foreign corporations end (in each case
without regard to when the arrangement was entered into).
0
Par. 5. Section 1.958-1, as amended in a final rule published elsewhere
in this issue of the Federal Register, effective January 25, 2022, is
amended by:
0
1. Revising the first sentence of paragraph (d)(1);
0
2. Revising paragraph (d)(2)(v);
0
3. Adding a sentence to the end of paragraph (d)(4)(i); and
0
4. Adding paragraph (e).
The revisions and addition read as follows:
Sec. 1.958-1 Direct and indirect ownership of stock.
* * * * *
(d) * * * (1) * * * Except as otherwise provided in paragraph
(d)(2) of this section, for purposes of sections 951, 951A, 953(c), and
956(a) and Sec. 1.964-1(c), and for purposes of any provision that
specifically applies by reference to any of such sections or the
regulations in this part under section 951, 951A, 953, or 956 (but only
as the regulations in this part under section 953 or section 956 relate
to section 953(c) or section 956(a), respectively), a domestic
partnership is not treated as owning stock of a foreign corporation
within the meaning of section 958(a). * * *
(2) * * *
(v) Applying section 953(c)(1)(A) for purposes of determining
whether any foreign corporation is a controlled foreign corporation as
defined in sections 953(c)(1)(B), 953(c)(3)(E), or 953(d)(1)(A).
* * * * *
(4) * * *
(i) * * * Notwithstanding the prior sentences, paragraph (d)(2)(v)
of this section and the inclusion of the references to section 953(c)
and Sec. 1.964-1(c) in paragraph (d)(1) of this section apply to
taxable years of foreign corporations beginning on or after [date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register], and to taxable years of United
States persons in which or with which such taxable years of foreign
corporations end.
* * * * *
(e) Elective entity treatment for certain S corporations--(1) In
general. Except as otherwise provided in this paragraph (e), with
respect to an S corporation (as defined in section 1361(a)(1)),
paragraph (d)(1) of this section shall not apply, and such S
corporation shall be treated as owning stock of a foreign corporation
within the meaning of section 958(a), if--
(i) The S corporation and its shareholders (where applicable) make
the election described in paragraph (e)(2) of this section;
(ii) The S corporation made its election under section 1362(a)
before June 22, 2019;
(iii) The S corporation would have been treated as owning stock of
a controlled foreign corporation within the meaning of section 958(a)
on June 22, 2019, if Sec. 1.951A-1(e) (as in effect and contained in
26 CFR part 1, as
[[Page 3911]]
revised April 1, 2021) did not apply to it;
(iv) The S corporation had transition accumulated earnings and
profits (as defined in paragraph (e)(3) of this section) on September
1, 2020, or on the first day of any subsequent taxable year; and
(v) The S corporation maintains sufficient records to support the
determination of the transition accumulated earnings and profits
amount.
(2) Election--(i) Time and manner of making election. With respect
to the first taxable year ending on or after September 1, 2020, an S
corporation may irrevocably elect to apply the provisions of paragraph
(e)(1) of this section on a timely-filed (including extensions)
original Form 1120-S, ``U.S. Income Tax Return for an S Corporation,''
by attaching a statement to such return including the contents of
paragraph (e)(2)(ii) of this section. For taxable years of an S
corporation ending before September 1, 2020, and after June 21, 2019,
the S corporation and all of its shareholders may irrevocably elect to
apply the provisions of paragraph (e)(1) of this section on timely-
filed (including extensions) original returns or on amended returns
filed by March 15, 2021, by attaching a statement including the
contents of paragraph (e)(2)(ii) of this section thereto. An election
described in Section 3.02 of Notice 2020-69, 2020-39 I.R.B. 604 that is
filed (in the time and manner specified in Section 3.02 of Notice 2020-
69) on or before [date of publication of the Treasury decision adopting
these rules as final regulations in the Federal Register] is deemed to
satisfy the election requirement of this paragraph (e)(2).
(ii) Contents of election statement. The statement described in
paragraph (e)(2)(i) of this section must:
(A) Identify that the S corporation and its shareholders (where
applicable) are electing for the S corporation to be treated as owning
stock of a foreign corporation within the meaning of section 958(a)
under paragraph (e)(2) of this section;
(B) Include the amount of transition accumulated earnings and
profits (as defined in paragraph (e)(3) of this section); and
(C) Where applicable, be signed by a person authorized to sign the
S corporation's return that is required to be filed under section 6037.
(3) Transition accumulated earnings and profits--(i) In general.
For purposes of this section, the term transition accumulated earnings
and profits means, with respect to an S corporation and its
shareholders, the amount of accumulated earnings and profits of the S
corporation calculated as of September 1, 2020, reduced as described in
paragraph (e)(3)(ii) of this section. Transition accumulated earnings
and profits are not increased as a result of transactions occurring (or
entity classification elections described in Sec. 301.7701-3 of this
chapter filed) after September 1, 2020. For purposes of this section,
transition accumulated earnings and profits are not transferable to
another person under any provision of the Code.
(ii) Reduction solely by distributions. An S corporation with
transition accumulated earnings and profits is treated as having no
transition accumulated earnings and profits if, beginning after
September 1, 2020, the S corporation distributes in one or more
distributions a cumulative amount of accumulated earnings and profits
equal to or greater than the amount of the S corporation's transition
accumulated earnings and profits as of September 1, 2020.
(4) Required aggregate treatment. In the case of an S corporation
that has made an election under paragraph (e)(2) of this section and
which satisfies the additional requirements of paragraph (e)(1) of this
section, paragraph (d) of this section shall apply beginning with the S
corporation's first taxable year for which the S corporation has no
transition accumulated earnings and profits on the first day of that
year, and to each subsequent taxable year of the S corporation.
(5) Examples. The following examples illustrate the application of
paragraph (e).
(i) Example 1--(A) Facts. Individual A and Individual B, each a
United States citizen, respectively own 5% and 95% of the single class
of stock of SCX, an S corporation. SCX's sole asset is 100% of the
single class of stock of FC, a controlled foreign corporation, which
SCX has held since June 1, 2019. None of SCX, Individual A, or
Individual B own shares, directly or indirectly, in any other
controlled foreign corporation. Individual A, Individual B, SCX, and FC
all use the calendar year as their taxable year. On January 1, 2021,
SCX has transition accumulated earnings and profits of $100x and AAA of
$0. SCX elects to apply the transition rules under paragraph (e)(1) of
this section. During the 2021 taxable year, FC has $200x of tested
income (within the meaning of Sec. 1.951A-2(b)(1)) and $0 of qualified
business asset investment (QBAI) (within the meaning of Sec. 1.951A-
3(b)).
(B) Analysis--(1) S corporation level. As an electing S corporation
with transition accumulated earnings and profits on the first day of
the taxable year (January 1, 2021), SCX is treated as owning (within
the meaning of section 958(a)) all the stock of FC for purposes of
applying sections 951 and 951A and any provision that applies
specifically by reference thereto. Accordingly, SCX, a United States
shareholder of FC, determines its GILTI inclusion amount under Sec.
1.951A-1(c)(1) for its 2021 taxable year. SCX's pro rata share of FC's
tested income is $200x, and its pro rata share of FC's QBAI is $0.
SCX's net CFC tested income (within the meaning of Sec. 1.951A-
1(c)(2)) is $200x, and its net deemed tangible income return (within
the meaning of Sec. 1.951A-1(c)(3)) is $0. As a result, SCX's GILTI
inclusion amount for 2021 is $200x. At the end of 2021, SCX increases
its AAA by $200x to reflect the GILTI inclusion amount. Because SCX
computes its income as an individual under section 1363(b), it cannot
take a section 250 deduction for any GILTI inclusion amount. See Sec.
1.250(a)-1(c)(1).
(2) S corporation shareholder level. Neither Individual A nor
Individual B is treated as owning the stock in FC within the meaning of
section 958(a). Accordingly, Individual A and Individual B include in
gross income their pro rata shares of SCX's GILTI inclusion amount as
described in section 1366(a), which is $10x ($200x x 5%) for Individual
A and $190x ($200x x 95%) for Individual B.
(ii) Example 2--(A) Facts. The facts are the same as in paragraph
(e)(5)(i) of this section, except that, on December 31, 2021, SCX
distributes $300x to its shareholders. In addition, FC has an
additional $200x of tested income (within the meaning of Sec. 1.951A-
2(b)(1)) and $0 of QBAI (within the meaning of Sec. 1.951A-3(b))
during the 2022 taxable year.
(B) Analysis--(1) Determination of transition accumulated earnings
and profits. Before taking into account the distribution on December
31, 2021, the results for taxable year 2021 are the same as in
paragraph (e)(5)(i)(B) of this section. For 2021, $200x, the portion of
SCX's $300x distribution that does not exceed AAA, is subject to
section 1368(c)(1). The remaining distribution of $100x is treated as a
dividend under section 316 to the extent of SCX's accumulated earnings
and profits. As of January 1, 2022, SCX has $0 of transition
accumulated earnings and profits under paragraph (e)(3) of this section
because the cumulative amount of SCX's distributions out of accumulated
earnings and profits after
[[Page 3912]]
September 1, 2020, equals or exceeds the amount of SCX's transition
accumulated earnings and profits as of September 1, 2020.
(2) S corporation level. Because SCX has no transition accumulated
earnings and profits as of January 1, 2022, paragraph (d) of this
section applies to SCX for its taxable year 2022 and for each
subsequent taxable year. As a result, for purposes of determining a
GILTI inclusion amount in its taxable year 2022, SCX is not treated as
owning (within the meaning of section 958(a)) the FC stock; instead,
SCX is treated in the same manner as a foreign partnership for purposes
of determining the FC stock owned by Individual A and Individual B
under section 958(a)(2). Accordingly, SCX does not have a GILTI
inclusion amount for its 2022 taxable year (or for any subsequent
taxable year) and therefore will not increase its AAA as a result of
GILTI inclusion amounts attributable to FC stock for its taxable year
2022 (or for any subsequent taxable year).
(3) S corporation shareholder level. With respect to Individual A,
for purposes of determining the GILTI inclusion amount for taxable year
2022, Individual A is treated as owning 5% of the FC stock under
section 958(a). Individual A is not a United States shareholder of FC
because Individual A owns (within the meaning of section 958(a) and
(b)) less than 10% of the FC stock. Accordingly, Individual A does not
have a GILTI inclusion amount for taxable year 2022. With respect to
Individual B, for purposes of determining the GILTI inclusion amount
for taxable year 2022, Individual B is treated as owning 95% of the FC
stock under section 958(a). In addition, Individual B is a United
States shareholder of FC because Individual B owns (within the meaning
of section 958(a) and (b)) at least 10% of the FC stock. Accordingly,
Individual B's pro rata share of FC's tested income is $190x ($200x x
95%), and Individual B's pro rata share of FC's QBAI is $0. Individual
B's net CFC tested income is $190x, and Individual B's net deemed
tangible income return is $0. As a result, Individual B's GILTI
inclusion amount for taxable year 2022 is $190x.
(6) Applicability date. This paragraph (e) applies to taxable years
of S corporations ending on or after September 1, 2020. Taxpayers may
choose to apply this paragraph (e) to taxable years of S corporations
ending on or after June 22, 2019, provided that the S corporation and
its shareholders that are United States shareholders consistently apply
the rules set forth in this paragraph (e) with respect to all
controlled foreign corporations whose stock the S corporation owns
within the meaning of section 958(a).
* * * * *
0
Par. 6. Section 1.964-1 is amended by:
0
1. Revising the first sentence of paragraph (c)(2);
0
2. Removing the language ``domestic shareholders'' in the first
sentence of paragraph (c)(3)(ii) and adding ``United States persons''
in its place;
0
3. Revising paragraph (c)(3)(iii);
0
4. Removing the language ``noncontrolled section 902 corporation'' in
paragraphs (c)(4)(i)(B) and (c)(4)(ii) and adding ``noncontrolled
foreign corporation'' in its place;
0
5. Revising paragraph (c)(5)(ii);
0
6. Redesignating paragraph (c)(8) as paragraph (c)(9);
0
7. Adding a new paragraph (c)(8); and
0
8. In paragraph (d):
0
i. Revising the heading;
0
ii. Removing ``Paragraphs (c)(1)(v) through (c)(6),'' ``26 CFR 1.964-
1T(c)(1)(v) through (c)(6),'' and ``paragraphs (c)(1)(v) through
(c)(6)'' everywhere they appear and adding ``Paragraphs (c)(1)(v) and
(vi) and (c)(2) through (6),'' ``26 CFR 1.964-1T(c)(1)(v) and (vi) and
(c)(2) through (6),'' and ``paragraphs (c)(1)(v) and (vi) and (c)(2)
through (6)'' in their places, respectively; and
0
iii. Adding two sentences to the end of the paragraph.
The revisions and additions read as follows:
Sec. 1.964-1 Determination of the earnings and profits of a foreign
corporation.
* * * * *
(c) * * *
(2) * * * For the first taxable year of a foreign corporation in
which such foreign corporation first qualifies as a controlled foreign
corporation (as defined in section 957 or 953) or a foreign corporation
(other than a controlled foreign corporation as defined in section 957
or 953) as to which a United States person that is a United States
shareholder (within the meaning of section 951(b)) owns stock (within
the meaning of section 958(a)) (such corporation, a ``noncontrolled
foreign corporation''), any method of accounting or taxable year
allowable under this section may be adopted, and any election allowable
under this section may be made, by such foreign corporation or on its
behalf notwithstanding that, in previous years, its books or financial
statements were prepared on a different basis, and notwithstanding that
such election is required by the Code or regulations in this chapter to
be made in a prior taxable year. * * *
(3) * * *
(iii) Notice--(A) In general. Except as otherwise provided in
paragraph (c)(3)(iii)(B) of this section, on or before the filing date
described in paragraph (c)(3)(ii) of this section, the controlling
domestic shareholders must provide written notice of the election made
or the adoption or change of method or taxable year effected to all
other persons known by them to be United States persons that own
(within the meaning of section 958(a)) stock of the foreign corporation
(domestic shareholders) and to any other United States person that is a
``Category 4 filer'' of Form 5471, ``Information Return of U.S. Persons
With Respect to Certain Foreign Corporations,'' with respect to the
foreign corporation (that is, certain United States persons that
control, within the meaning of section 6038(e), the foreign
corporation). Thus, for example, this notice is required to be provided
to domestic shareholders that own (within the meaning of section
958(a)) stock in the foreign corporation through one or more domestic
partnerships. The notice required in this paragraph (c)(3)(iii)(A) must
set forth the name, country of organization, and U.S. employer
identification number (if applicable) of the foreign corporation, and
the names, addresses, and stock interests of the controlling domestic
shareholders. Such notice must also describe the nature of the action
taken on behalf of the foreign corporation and the taxable year for
which made, and identify a designated shareholder that retains a
jointly executed consent confirming that such action has been approved
by all of the controlling domestic shareholders and containing the
signature of a principal officer of each such shareholder (or its
common parent). However, the failure of the controlling domestic
shareholders to provide such notice to a person required to be notified
does not invalidate the election made or the adoption or change of
method or taxable year effected.
(B) Special rule for domestic partnerships. A controlling domestic
shareholder will be deemed to satisfy the notice requirement of
paragraph (c)(3)(iii)(A) of this section with respect to any domestic
shareholder that is a partner in a domestic partnership by providing
notice to a domestic partnership (known to the controlling domestic
shareholder) through which the domestic shareholder owns stock of the
foreign corporation, instead of to the domestic shareholder.
* * * * *
(5) * * *
[[Page 3913]]
(ii) Noncontrolled foreign corporations. For purposes of this
paragraph (c), the controlling domestic shareholders of a noncontrolled
foreign corporation are its majority domestic shareholders. The
majority domestic shareholders of a noncontrolled foreign corporation
are those United States shareholders (within the meaning of section
951(b)) that own (within the meaning of section 958(a)) stock in the
noncontrolled foreign corporation and that, in the aggregate, own
(within the meaning of section 958(a)), or are considered as owning by
applying the rules of section 958(b), more than 50 percent of the
combined voting power of all of the voting stock of the noncontrolled
foreign corporation that is owned by all United States shareholders
that own (within the meaning of section 958(a)), or are considered as
owning by applying the rules of section 958(b), stock of the
noncontrolled foreign corporation.
* * * * *
(8) Stock owned through domestic partnerships. See Sec. 1.958-1(d)
for rules regarding the ownership of stock of a foreign corporation
through a domestic partnership for purposes of paragraph (c) of this
section and for purposes of any provision that specifically applies by
reference to paragraph (c) of this section.
* * * * *
(d) Applicability dates. * * * Notwithstanding the preceding
sentences in this paragraph (d), paragraphs (c)(2), (c)(3)(ii) and
(iii), (c)(4)(i)(B), (c)(4)(ii), (c)(5)(ii), and (c)(8) of this section
apply to taxable years of foreign corporations beginning on or after
[date of publication of the Treasury decision adopting these rules as
final regulations in the Federal Register], and to taxable years of
United States persons in which or with which such taxable years end.
For taxable years of foreign corporations beginning before [date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register], and to taxable years of foreign
United States persons in which or with which such taxable years end,
see Sec. 1.964-1(c)(2), (c)(3)(ii) and (iii), (c)(4)(i)(B),
(c)(4)(ii), and (c)(5)(ii) as in effect and contained in 26 CFR part 1,
as revised April 1, 2021.
0
Par. 7. Section 1.1291-1 is amended by:
0
1. Revising paragraphs (b)(7), (c)(4)(i), and (c)(4)(ii)(A) and (B);
0
2. Adding paragraph (c)(5);
0
3. Removing the language ``Paragraphs (c)(3) and (4)'' in paragraph
(j)(1) and adding ``Paragraph (c)(3)'' in its place;
0
4. Removing the language ``paragraphs (b)(2)(ii) and (v), (b)(7) and
(8), and (e)(2) of this section'' in paragraph (j)(3) and adding
``paragraphs (b)(2)(ii) and (v), (b)(8), and (e)(2) of this section''
in its place; and
0
5. Adding paragraph (j)(5).
The revisions and additions read as follows:
Sec. 1.1291-1 Taxation of U.S. persons that are shareholders of
section 1291 funds.
* * * * *
(b) * * *
(7) Shareholder. Except as otherwise provided in this paragraph
(b)(7) or paragraph (e) of this section, a shareholder of a PFIC is a
United States person that directly owns stock of a PFIC (a direct
shareholder), or that is an indirect shareholder (as defined in
paragraph (b)(8) of this section). Notwithstanding the previous
sentence, neither a domestic partnership nor an S corporation (as
defined in section 1361(a)(1)) is treated as a shareholder of a PFIC.
In addition, to the extent that a person is treated under sections 671
through 678 as the owner of a portion of a domestic trust, the trust is
not treated as a shareholder of a PFIC with respect to PFIC stock held
by that portion of the trust, except for purposes of the information
reporting requirements of Sec. 1.1298-1(b)(3)(i) (imposing an
information reporting requirement on domestic liquidating trusts and
fixed investment trusts).
* * * * *
(c) * * *
(4) * * * (i) In general. If PFIC stock is marked to market for any
taxable year under section 475 or any other provision of chapter 1 of
the Internal Revenue Code, other than section 1296, regardless of
whether the application of such provision is mandatory or results from
an election by the shareholder (as defined in paragraph (b)(7) of this
section) or another person, then, except as provided in paragraph
(c)(4)(ii) of this section, section 1291 and the regulations in this
part thereunder do not apply to any distribution with respect to such
PFIC stock or to any disposition of such PFIC stock for such taxable
year. See Sec. Sec. 1.1295-1(i)(3) and 1.1296-1(h)(3)(i) for rules
regarding the automatic termination of an existing election under
section 1295 or section 1296 when a shareholder marks to market PFIC
stock under section 475 or any other provision of chapter 1 of the
Internal Revenue Code.
(ii) * * * (A) Notwithstanding any provision in this section to the
contrary, with respect to a shareholder (as defined in paragraph (b)(7)
of this section), the rule of paragraph (c)(4)(ii)(B) of this section
applies to the first taxable year in which the shareholder's PFIC stock
is marked to market under a provision of chapter 1 of the Internal
Revenue Code, other than section 1296, if such foreign corporation was
a PFIC for any taxable year before the taxable year in which the PFIC
stock is marked to market, which is during the shareholder's holding
period (as defined in section 1291(a)(3)(A) and Sec. 1.1296-1(f)) in
such stock, and for which such corporation was not treated as a QEF
with respect to such shareholder.
(B) For the first taxable year of a shareholder in which the
shareholder's PFIC stock is marked to market under any provision of
chapter 1 of the Internal Revenue Code, other than section 1296, such
shareholder, in lieu of the rules under which the stock is marked to
market, applies the rules of Sec. 1.1296-1(i)(2) and (3) as if an
election had been made under section 1296 for such first taxable year.
(5) Coordination with section 1297(d)--(i) In general. For purposes
of section 1297(d), with respect to a partner or S corporation
shareholder that would be considered an indirect shareholder, through
its ownership in a domestic partnership or S corporation, with respect
to a foreign corporation that is a PFIC and a controlled foreign
corporation (as defined in section 957), the term ``qualified portion''
does not include any portion of such indirect shareholder's holding
period during which it was not a United States shareholder (as defined
in section 951(b)) with respect to the foreign corporation.
(ii) Transition rule. For taxable years of shareholders beginning
before [date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register], or for taxable
years of shareholders of an S corporation in which the S corporation
elects to apply Sec. 1.958-1(e), for purposes of section 1297(d), a
partner's or S corporation shareholder's qualified portion with respect
to the foreign corporation includes the portion of its holding period
during which it--
(A) Is an indirect shareholder under paragraph (b)(8)(iii)(A) or
(B) of this section with respect to the foreign corporation; and
(B) Included in gross income its distributive or pro rata share of
any amount that the domestic partnership or S corporation,
respectively, included under sections 951(a)(1) and 951A(a) with
respect to stock in the foreign corporation (treating the requirement
in this paragraph (c)(5)(ii)(B) as not satisfied to the extent Sec.
1.958-1(d)(1) through (3) is applied with respect to
[[Page 3914]]
the domestic partnership or S corporation before their general
applicability date under Sec. 1.958-1(d)(4) or the domestic
partnership or S corporation relied on the earlier proposed version of
such provisions). See, for example, Sec. 1.951A-1(e)(2).
* * * * *
(j) * * *
(5) Paragraphs (b)(7), (c)(4)(i), (c)(4)(ii)(A) and (B), and (c)(5)
of this section apply to taxable years of shareholders beginning on or
after [date of publication of the Treasury decision adopting these
rules as final regulations in the Federal Register]. For taxable years
of shareholders beginning before [date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register], see Sec. 1.1291-1(b)(7), (c)(4)(i), and (c)(4)(ii)(A) and
(B) as in effect and contained in 26 CFR part 1, as revised April 1,
2021.
Sec. 1.1291-9 [Amended]
0
Par. 8. Section 1.1291-9 is amended by:
0
1. Removing the language ``the undistributed earnings and profits,
within the meaning of section 902(c)(1)'' in paragraph (a)(2)(i) and
adding ``the amount of the earnings and profits of the foreign
corporation (computed in accordance with sections 964(a) and 986)'' in
its place;
0
2. Removing the language ``section 1297(e) PFIC'' in paragraphs (i) and
(j)(2)(v) introductory text and adding ``section 1297(d) PFIC'' in its
place wherever it appears; and
0
3. Removing the language ``section 1297(e)(2)'' in paragraph
(j)(2)(v)(A) and adding ``section 1297(d)(2)'' in its place.
0
Par. 9. Section 1.1293-1 is amended by:
0
1. Adding paragraphs (a)(3) and (4);
0
2. Revising paragraphs (c)(1) and (2);
0
3. Redesignating paragraph (c)(3) as paragraph (c)(4);
0
4. Adding a new paragraph (c)(3); and
0
5. Revising newly redesignated paragraph (c)(4).
The additions and revisions read as follows:
Sec. 1.1293-1 Current taxation of income from qualified electing
funds.
(a) * * *
(3) Pass-through entity defined. For purposes of this section, the
term pass-through entity has the meaning provided in Sec. 1.1295-
1(j)(2).
(4) Applicability dates. Paragraph (a)(3) of this section applies
to taxable years of shareholders beginning on or after [date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register].
* * * * *
(c) * * * (1) In general. Except as otherwise provided in this
paragraph (c), a shareholder that makes a section 1295 election as
provided in Sec. 1.1295-1(d)(2) with respect to stock in a PFIC that
it is treated as owning by reason of an interest in a pass-through
entity, or a shareholder that is treated as owning stock in a QEF by
reason of an interest in a domestic partnership that has made a
preexisting partnership section 1295 election (within the meaning of
Sec. 1.1295-1(d)(2)(i)(B)) or in an S corporation that has made a
preexisting S corporation section 1295 election (within the meaning of
Sec. 1.1295-1(d)(2)(ii)(B)), includes in income its pro rata share of
ordinary earnings and net capital gain attributable to the QEF stock as
if the shareholder directly owned its share of the QEF stock held by
the pass-through entity.
(2) Section 1295 election made by domestic nongrantor trust or
domestic estate. Notwithstanding paragraph (c)(1) of this section, if a
domestic nongrantor trust or domestic estate makes a section 1295
election as provided in Sec. 1.1295-1(d)(2)(iii)(A)(1) with respect to
PFIC stock that it owns, the domestic nongrantor trust or domestic
estate includes in income its pro rata share of ordinary earnings and
net capital gain attributable to the QEF stock. A shareholder that is
treated as owning such QEF stock by reason of an interest in the
domestic nongrantor trust or domestic estate accounts for its pro rata
share of ordinary earnings and net capital gain attributable to such
stock according to the general rules applicable to inclusions of income
from the domestic nongrantor trust or domestic estate.
(3) QEF stock transferred to a pass-through entity--(i) In general.
Except as otherwise provided in this paragraph (c)(3), if a shareholder
transfers stock in a PFIC subject to a section 1295 election to a pass-
through entity in which it is an interest holder, such shareholder
continues to include in income its pro rata share of ordinary earnings
and net capital gain attributable to the QEF stock held by the
transferee pass-through entity, under paragraph (c)(1) of this section.
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.
(ii) Shareholders other than the transferor. Except as otherwise
provided in this paragraph (c)(3), if a shareholder transfers stock in
a PFIC subject to a section 1295 election to a pass-through entity and
such stock is not subject to a preexisting QEF election made by the
pass-through entity, any other person that becomes a shareholder of
such PFIC as a result of the transfer will be subject to the income
inclusion rules of this section only if such person makes a section
1295 election with respect to the transferred PFIC stock under Sec.
1.1295-1(d)(2).
(iii) QEF stock transferred to domestic nongrantor trust.
Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, if a
shareholder transfers stock in a PFIC subject to a section 1295
election to a domestic nongrantor trust in which it is a beneficiary,
and the transferee domestic nongrantor trust makes a section 1295
election with respect to that stock pursuant to Sec. 1.1295-
1(d)(2)(iii)(A)(1), the domestic nongrantor trust, and the transferor
and any person that becomes a shareholder of the QEF as a result of the
transfer, take into account their share of ordinary earnings and net
capital gain attributable to the QEF shares under paragraph (c)(2) of
this section. If the transferee domestic nongrantor trust does not make
a section 1295 election with respect to the transferred PFIC stock, the
transferor continues to be subject, in its capacity as an indirect
shareholder, to the income inclusion rules of paragraph (c)(1) of this
section.
(4) Applicability date. Paragraph (c) of this section applies to
taxable years of shareholders beginning on or after [date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register]. For taxable years of shareholders
beginning before [date of publication of the Treasury decision adopting
these rules as final regulations in the Federal Register], see Sec.
1.1293-1(c), as in effect and contained in 26 CFR part 1, as revised
April 1, 2021.
0
Par. 10. Section 1.1295-1 is amended by:
0
1. Revising paragraph (b)(3);
0
2. Removing the language ``are defined in paragraph (j) of this
section'' in paragraph (c)(1) and adding ``are defined in paragraphs
(j)(3) and (4) of this section, respectively'' in its place;
0
3. Removing the language ``(as defined in paragraph (j) of this
section)'' in paragraph (c)(2)(iv) and adding ``(as defined in
paragraph (j)(2) of this section)'' in its place;
0
4. Revising paragraphs (d)(1), (d)(2)(i)(A) and (B), and (d)(2)(ii);
0
5. In paragraph (d)(2)(iii)(A)(1):
0
i. Removing the language ``Sec. 1.1293-1(c)(1)'' and adding ``Sec.
1.1293-1(c)(2)'' in its place; and
0
ii. Removing the language ``domestic trust or estate'' and adding
``domestic
[[Page 3915]]
nongrantor trust or domestic estate'' in its place;
0
6. Revising paragraph (f)(2)(i) introductory text;
0
7. Redesignating paragraph (f)(3) as paragraph (f)(5);
0
8. Adding a new paragraph (f)(3) and paragraph (f)(4);
0
9. Removing the language ``as defined in paragraph (j) of this
section'' in paragraph (g)(3) and adding ``as defined in paragraph
(j)(1) of this section'' in its place;
0
10. Removing the language ``(as defined in paragraph (j) of this
section)'' and ``Sec. 1.1295-1'' in paragraph (h) and adding ``(as
defined in paragraph (j)(4) of this section)'' and ``this section'' in
their places, respectively;
0
11. Removing and reserving paragraph (i)(1)(ii);
0
12. Revising paragraph (j); and
0
13. In paragraph (k):
0
i. Revising the heading;
0
ii. Removing the language ``(b)(3),'' in the first sentence;
0
iii. Removing the language ``and (c) through (j) of this section'' in
the first sentence and adding ``(c), (d)(2)(iv), (d)(3) through (d)(6),
(e), (f)(1), (f)(2)(ii), (g), (h), (i)(1)(i) and (iii), and (i)(2)
through (5) of this section'' in its place;
0
iv. Removing the language ``(f) and (g) of this section'' in the second
sentence of and adding ``(f)(1), (f)(2)(ii), and (g) of this section''
in its place;
0
v. Removing the third sentence; and
0
vi. Adding two sentences at the end of the paragraph.
The revisions and additions read as follows:
Sec. 1.1295-1 Qualified electing funds.
* * * * *
(b) * * *
(3) Application of general rules to stock held by a pass through
entity--(i) Stock subject to a section 1295 election transferred to a
domestic nongrantor trust or domestic estate. A shareholder's section
1295 election will not apply to a domestic nongrantor trust or domestic
estate to which the shareholder transfers stock subject to a section
1295 election, or to any other United States person that is a
beneficiary of the domestic nongrantor trust or estate. However, as
provided in paragraph (c)(2)(iv) of this section (relating to a
transfer to a domestic pass through entity of stock subject to a
section 1295 election), a shareholder that transfers stock subject to a
section 1295 election to a domestic nongrantor trust or domestic estate
will continue to be subject to the section 1295 election with respect
to the stock indirectly owned through the domestic nongrantor trust or
domestic estate and any other stock of that PFIC owned by the
shareholder.
(ii) Limitation on application of domestic nongrantor trust's or
domestic estate's section 1295 election. Except as provided in
paragraph (c)(2)(iv) of this section, a section 1295 election made by a
domestic nongrantor trust or domestic estate does not apply to other
stock of the PFIC held directly or indirectly by the beneficiary.
(iii) Effect of partnership termination on preexisting partnership
section 1295 election. The termination of a preexisting partnership
section 1295 election (within the meaning of paragraph (d)(2)(i)(B) of
this section) by reason of the termination of the partnership under
section 708(b) will not terminate the section 1295 election with
respect to partners of the terminated partnership that are partners of
the new partnership (continuing partners). The stock of the PFIC of
which a new partner (partners other than continuing partners) is an
indirect shareholder will be treated as stock of a QEF with respect to
such partner only if the new partner makes or has made a section 1295
election with respect to that stock under paragraph (d)(2)(i)(A) of
this section.
(iv) Characterization of stock held through a pass-through entity.
Stock of a PFIC held through a pass-through entity will be treated as
stock of a pedigreed QEF with respect to a shareholder (as defined in
paragraph (j)(3) of this section) that is treated as owning such stock
by reason of an interest in the pass-through entity only if--
(A) In the case of PFIC stock acquired (other than in a transaction
in which gain is not fully recognized, including pursuant to
regulations in this part under section 1291(f)) and held by a domestic
pass-through entity, the domestic pass-through entity has made a
preexisting section 1295 election under paragraph (d)(2)(i)(B) or
(d)(2)(ii)(B) of this section, or makes an election under paragraph
(d)(2)(iii)(A)(1) of this section, and the PFIC has been a QEF with
respect to the pass-through entity for all taxable years that are
included in the pass-through entity's holding period of the PFIC stock
and during which the foreign corporation was a PFIC within the meaning
of Sec. 1.1291-9(j)(1);
(B) In the case of PFIC stock acquired (other than in a transaction
in which gain is not fully recognized, including pursuant to
regulations in this part under section 1291(f)) and held by a domestic
pass-through entity, other than PFIC stock described in paragraph
(b)(3)(iv)(A) of this section, through which the shareholder is treated
as owning such PFIC stock, the shareholder makes the section 1295
election under paragraph (d)(2)(i)(A), (d)(2)(ii)(A),
(d)(2)(iii)(A)(2), or (d)(2)(iii)(B) of this section, and the PFIC has
been a QEF with respect to the shareholder for all taxable years that
are included in the shareholder's holding period for the PFIC stock,
and during which the foreign corporation was a PFIC within the meaning
of Sec. 1.1291-9(j)(1); or
(C) In the case of PFIC stock transferred by an interest holder or
beneficiary to a pass-through entity in a transaction in which gain is
not fully recognized (including pursuant to regulations in this part
under section 1291(f)), if the pass-through entity made a preexisting
section 1295 election under paragraph (d)(2)(i)(B) or (d)(2)(ii)(B) of
this section with respect to the PFIC stock, or the shareholder or
pass-through entity, as applicable, makes a section 1295 election under
paragraph (d)(2)(i)(A), (d)(2)(ii)(A), (d)(2)(iii)(A)(1) or (2), or
(d)(2)(iii)(B) of this section, in each case for the taxable year in
which the transfer was made, or the shareholder's section 1295 election
continues pursuant to paragraph (c)(2)(iv) of this section. If the
foreign corporation was a PFIC within the meaning of Sec. 1.1291-9(j)
at the time of the transfer, the PFIC stock transferred will be treated
as stock of a pedigreed QEF with respect to a transferor, however, only
if that stock was treated as stock of a pedigreed QEF with respect to
the transferor at the time of the transfer. In all cases subject to
this paragraph (b)(3)(iv)(C), the PFIC stock will be treated as stock
of a pedigreed QEF only if the PFIC has been a QEF for all taxable
years of the PFIC that are included wholly or partly in the
shareholder's holding period of the PFIC stock during which the foreign
corporation was a PFIC within the meaning of Sec. 1.1291-9(j).
(v) Characterization of stock distributed by a partnership. In the
case of PFIC stock distributed by a partnership to one or more partners
in a transaction in which gain is not fully recognized (including
pursuant to regulations in this part under section 1291(f)), the PFIC
stock will be treated as stock of a pedigreed QEF by a shareholder only
if that stock was treated as stock of a pedigreed QEF with respect to
the shareholder immediately before the distribution, or, in the case of
a distribution of PFIC stock by a partnership to one or more partners
in the first year of the distributee partner or partners' holding
period of the PFIC stock, the distributee partner or partners
[[Page 3916]]
make an election as provided in paragraph (d)(2) of this section.
* * * * *
(d) * * * (1) General rule. Except as otherwise provided in this
paragraph (d), any shareholder (as defined in paragraph (j)(3) of this
section) of a PFIC, including a shareholder that holds stock of a PFIC
in bearer form, may make a section 1295 election with respect to that
PFIC. The shareholder need not own directly or indirectly any stock of
the PFIC when the shareholder makes the section 1295 election provided
the shareholder is a shareholder of the PFIC during the taxable year of
the PFIC that ends with or within the taxable year of the shareholder
for which the section 1295 election is made.
(2) * * * (i) * * * (A) In general. If a partnership (domestic or
foreign) holds stock of a PFIC, the section 1295 election with respect
to such PFIC is made by a shareholder (as defined in paragraph (j)(3)
of this section) indirectly owning the PFIC stock by reason of its
interest in the partnership. A section 1295 election made by a
shareholder under this paragraph (d)(2)(i)(A) applies to the stock of
the PFIC indirectly owned by the shareholder by reason of its interest
in the partnership and to any other stock of the PFIC owned by the
shareholder. A shareholder making an election under this paragraph
(d)(2)(i)(A) must do so in the form and manner provided in paragraph
(f) of this section. The shareholder must also notify the partnership
of the election no later than 30 days after filing the return in which
the election is made; the shareholder may notify the partnership in any
reasonable manner. However, the failure of the shareholder to notify
the partnership of its election does not invalidate an otherwise valid
election under this paragraph (d)(2)(i)(A). A shareholder making an
election under this paragraph (d)(2)(i)(A) accounts for its pro rata
share of ordinary earnings and net capital gain attributable to the QEF
stock as provided in Sec. 1.1293-1(c)(1).
(B) Preexisting section 1295 election by domestic partnership. Any
section 1295 election made by a domestic partnership with respect to a
PFIC effective for taxable years of the PFIC ending on or before [date
of publication of the Treasury decision adopting these rules as final
regulations in the Federal Register] (preexisting partnership section
1295 election) will be treated as if it were made by each shareholder
that is treated as owning stock in the PFIC by reason of its interest
in the d
[…truncated; see source link]Indexed from Federal Register on January 25, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.