[Federal Register Volume 69, Number 85 (Monday, May 3, 2004)]
[Rules and Regulations]
[Pages 24071-24078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9645]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9123]
RIN 1545-AY17


Electing Mark to Market for Marketable Stock

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide 
procedures for certain United States persons holding marketable stock 
in a passive foreign investment company (PFIC) to elect mark to market 
treatment for that stock under section 1296 of the Internal Revenue 
Code and related provisions of sections 1291 and 1295. These final 
regulations affect United States persons owning marketable stock in a 
PFIC.

DATES: Effective Date: These regulations are effective May 3, 2004.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.1291-1(j), 1.1295-1(k), and 1.1296-1(j).

FOR FURTHER INFORMATION CONTACT: Alexandra K. Helou, (202) 622-3840 
(not a toll free number).

SUPPLEMENTARY INFORMATION:

Background

    On July 31, 2002, the IRS published in the Federal Register a 
notice of proposed rulemaking (REG-112306-00; 2002-44 I.R.B. 767) under 
section 1296 and related provisions of the Internal Revenue Code 
(Code). Two written comments were received in response to the notice of 
proposed rulemaking. No public hearing was requested or held on the 
notice of proposed rulemaking. After consideration of the comments, the 
proposed regulations are adopted as final regulations with the 
modifications discussed below.

Summary of Public Comments and Explanation of Changes

A. Deferral of Post-October PFIC Losses by Regulated Investment 
Companies (RICs) Under Section 852(b)(10)

    One commentator recommended that the regulations provide guidance 
regarding the determination of post-October ``net reduction in value'' 
of PFIC stock held by a RIC under section 852(b)(10). Section 
852(b)(10) provides that taxable income of a RIC (other than a RIC to 
which an election under section 4982(e)(4) applies) shall be computed 
without regard to any net reduction in value occurring after October 31 
of the taxable year of any stock of a PFIC with respect to which an 
election under section 1296(k) is in effect and that any such reduction 
shall be treated as occurring on the first day of the following taxable 
year.
    To address concerns relating to a RIC's post-October period, the 
commentator provided three recommendations. First, that the regulations 
clarify whether the deferral of post-October PFIC losses under section 
852(b)(10) is elective or mandatory; second, that RICs be permitted to 
defer their post-October losses under rules similar to those that apply 
to foreign currency gains and losses under Sec.  1.852-11; and third, 
that RICs be allowed to include actual post-October dispositions of 
PFIC stock when computing losses eligible for deferral.
    The IRS and Treasury have considered these recommendations and 
determined that the issues raised with respect to section 852(b)(10) 
are issues under the RIC tax provisions that are beyond the scope of 
this regulations project.

B. Situations Arising From Different Tax Years of RICs and the Foreign 
Corporations in Which They Invest

    One commentator requested guidance in instances where the RIC and a 
foreign corporation in which it invests have different or 
``mismatching'' taxable years. This commentator noted that a RIC may 
experience uncertainties with respect to determining its taxable income 
and minimum distribution amount in situations where, following the end 
of its taxable year, the RIC learns that a foreign corporation in which 
it has invested is a PFIC or that the foreign corporation no longer 
satisfies the income or asset tests of section 1297(a) for the current 
taxable year. To address administrative concerns arising in this 
situation, this commentator recommended that RICs be permitted to 
recognize a change in a foreign corporation's PFIC status in the RIC's 
taxable year within which the taxable year of the foreign corporation 
ends.
    Issues arising from different taxable years are not specific to 
PFICs for which a taxpayer has made a section 1296 election. 
Accordingly, this issue is beyond the scope of this regulations 
project. However, comments are requested for approaches that address 
issues arising when a taxpayer and a PFIC have different taxable years. 
Such issues may be addressed in a future regulations project.

C. Situations Where a RIC Owns Stock in a Foreign Corporation That No 
Longer Satisfies the PFIC Definition in the Current Year

    One commentator suggested that the regulations should address 
certain issues that arise with respect to a shareholder that has made a 
section 1296 election for its PFIC stock and the foreign corporation 
does not satisfy the income or asset test in section 1297(a) for the 
year. First, the commentator suggested that the regulations clarify 
that the character of gains from the disposition of the stock of the 
foreign corporation during the time that the corporation did not 
qualify as a PFIC should be capital gain. The commentator also 
requested that the regulations provide that the character of losses 
with respect to stock for which a section 1296 election was made but 
that is recognized in a taxable year during which the foreign 
corporation is not a PFIC be treated as ordinary income to the extent 
of any unreversed inclusions at the time of disposition.

[[Page 24072]]

    After consideration of these comments, and in accordance with the 
statutory provisions of section 1296, the IRS and Treasury have adopted 
the first comment, but not the second comment. Accordingly, two 
examples were added to the regulations. Example 2 in Sec.  1.1296-
1(c)(7) clarifies that any gain from the disposition of stock of a 
foreign corporation that does not qualify as a PFIC for the year of 
disposition will be capital gain because section 1296(c)(1)(A) no 
longer applies at such time. In the case of losses with respect to 
stock for which a section 1296 election was made but that is recognized 
in a taxable year during which the foreign corporation is not a PFIC, 
Example 4 in Sec.  1.1296-1(c)(7) was added to clarify that any loss 
from the disposition of such stock will be a capital loss because 
section 1296(c)(1)(B) no longer applies at such time.
    Second, the commentator recommended that the regulations provide 
automatic consent for RICs to terminate a section 1296 election during 
a year that a foreign corporation no longer satisfies the requirements 
for PFIC status. The IRS and Treasury have not adopted this 
recommendation. The IRS and Treasury believe that it is appropriate to 
require consent of the Commissioner to terminate a section 1296 
election. Under Sec.  1.1296-1(h)(3), a shareholder can request the 
consent of the Commissioner to revoke a section 1296 election upon a 
finding of a substantial change in circumstances, which may include a 
foreign corporation ceasing to be a PFIC.

D. Technical Coordination Issues Arising From Marking PFIC Stock to 
Market Under the Former Proposed Sec.  1.1291-8 and Notice 92-53

    A commentator suggested that the regulations should clarify how the 
former proposed Sec.  1.1291-8 (see Notice 92-53 (1992-2 C.B. 384)) and 
the current statutory PFIC mark to market rules under section 1296 
interact. For example, the commentator requested clarification 
concerning the RIC's adjustments to the basis of its PFIC stock to 
reflect gains previously included under the former proposed Sec.  
1.1291-8.
    The IRS and Treasury believe that no additional clarification is 
needed. To the extent a taxpayer increased its basis or received a new 
holding period under the former proposed Sec.  1.1291-8, those 
consequences will be respected even though the proposed regulations 
were withdrawn without being finalized following the enactment of 
current section 1296 (see 64 FR 5015 (February 2, 1999) withdrawing 
proposed Sec.  1.1291-8). As a result, the suggestion was not adopted.
    This same commentator also recommended that Example 2 of proposed 
Sec.  1.1296-1(i)(4) be clarified by specifically providing that the 
RIC had not made a mark to market election under the former proposed 
Sec.  1.1291-8. The commentator suggested this modification to 
eliminate potential ambiguities that may arise over the relationship 
between an election under the former proposed Sec.  1.1291-8 and 
section 1296. This suggestion was adopted, and the example has been 
revised accordingly.

E. The Regulations Should Allow Qualified Shareholders To Make 
Protective and Retroactive Mark to Market Elections

    One commentator recommended that the regulations should provide 
rules similar to those contained in the qualified electing fund (QEF) 
regime for purposes of making a retroactive QEF election. The IRS and 
Treasury have considered this comment and continue to believe that the 
appropriate process for retroactive relief for late mark to market 
elections is under the Sec.  301.9100 relief provisions, as set forth 
in Sec.  1.1296-1(h)(1)(iii). Accordingly, this suggestion was not 
adopted.

F. Termination of Existing Section 1296 Mark to Market Elections 
Without the Consent of the Commissioner

    One commentator suggested permitting a taxpayer with an existing 
section 1296 election to make a QEF election and terminate its existing 
1296 election without the consent of the Commissioner. The proposed 
regulations were structured to facilitate an election for mark to 
market treatment by permitting a taxpayer with an existing QEF election 
to make a section 1296 election and terminate the existing QEF election 
without requiring the consent of the Commissioner. Conversely, a 
taxpayer with an existing section 1296 election is permitted to make a 
QEF election only if the section 1296 election is terminated as 
provided by section 1296 and the regulations thereunder (e.g., if the 
PFIC stock ceases to be marketable) or is revoked with consent of the 
Commissioner. This approach reflects consideration of the relative 
administrative burdens imposed under each set of rules, and the stated 
intent of Congress that one of the purposes for enacting section 1296 
was to provide another alternative to the interest charge rules of 
section 1291 that would be available in instances where taxpayers 
cannot obtain sufficient information to make a QEF election. See H.R. 
Rep. No. 105-148, at 533 (1997); S. Rep. No. 105-33 at 94 (1997). After 
consideration of the comment, the IRS and Treasury continue to believe 
the rules coordinating QEF elections and mark to market elections under 
section 1296 are appropriate for the reasons discussed above. 
Accordingly, this recommendation was not adopted.

G. Proposals To Enhance the Utility of QEF Elections for RICs

    One commentator provided two suggestions focused on enhancing the 
utility of QEF elections for RICs. Specifically, the commentator first 
suggested allowing RICs to use U.S. Generally Accepted Accounting 
Principles (U.S. GAAP) or International Financial Reporting Standards 
(IFRS) for purposes of computing QEF inclusions under section 
1295(a)(2). The commentator also suggested revising the retroactive QEF 
election rules in cases where a RIC learns of the PFIC status of a 
foreign corporation immediately prior to the deadline for making a QEF 
election. These comments, which raise issues regarding the QEF rules, 
are beyond the scope of this regulation. Accordingly, these comments 
were not adopted but will be considered in the context of any guidance 
to be issued under the appropriate substantive provisions.

H. Additional Revisions

    The final regulations also clarify that the regulations apply to 
taxable years beginning on or after May 3, 2004. Additionally, the 
several examples in proposed Sec.  1.1296-1(c) have been grouped 
together in new Sec.  1.1296-1(c)(7) in order to make the regulation 
more readable.

Special Analysis

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and, because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

[[Page 24073]]

Drafting Information

    The principal author of these regulations is Alexandra K. Helou, 
Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes; Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
1. The authority citation for part 1 is amended by adding an entry in 
numerical order to read, in part, as follows:

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

    Section 1.1296-1 also issued under 26 U.S.C. 1296(g) and 26 
U.S.C. 1298(f). * * *

Sec.  1.1291-0  [Amended]

0
2. Sec.  1.1291-0 (table of contents) is amended by revising the 
introductory text and by adding the entries for Sec.  1.1291-1 to read 
as follows:


Sec.  1.1291-0  Treatment of shareholders of certain passive foreign 
investment companies; table of contents.

    This section contains a listing of the headings for Sec. Sec.  
1.1291-1, 1.1291-9, and 1.1291-10.

Section 1.1291-1 Taxation of U.S. persons that are shareholders of 
PFICs that are not pedigreed QEFs.

    (a) through (b) [Reserved].
    (c) Coordination with other PFIC rules.
    (1) and (2) [Reserved].
    (3) Coordination with section 1296: distributions and dispositions.
    (4) Coordination with mark to market rules under chapter 1 of the 
Internal Revenue Code other than section 1296.
    (i) In general.
    (ii) Coordination rule.
    (d) [Reserved].
    (e) Exempt organization as shareholder.
    (1) In general.
    (2) Effective date.
    (f) through (i) [Reserved].
    (j) Effective date.
* * * * *


Sec.  1.1291-1  [Amended]

0
3. Section 1.1291-1 is amended by:
0
1. Revising paragraphs (a) through (d).
0
2. Adding paragraphs (f) through (j).
    The revisions and additions read as follows:

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

    (a) and (b) [Reserved].
    (c) Coordination with other PFIC rules.
    (1) and (2) [Reserved].
    (3) Coordination with section 1296: distributions and dispositions. 
If PFIC stock is marked to market under section 1296 for any taxable 
year, then, except as provided in Sec.  1.1296-1(i), section 1291 and 
the regulations thereunder shall not apply to any distribution with 
respect to section 1296 stock (as defined in Sec.  1.1296-1(a)(2)), or 
to any disposition of such stock, for such taxable year.
    (4) Coordination with mark to market rules under chapter 1 of the 
Internal Revenue Code other than section 1296--(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 taxpayer or another 
person, then, except as provided in paragraph (c)(4)(ii) of this 
section, section 1291 and the regulations thereunder shall 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 taxpayer 
marks to market PFIC stock under section 475 or any other provision of 
chapter 1 of the Internal Revenue Code.
    (ii) Coordination rule--(A) Notwithstanding any provision in this 
section to the contrary, the rule of paragraph (c)(4)(ii)(B) of this 
section shall apply to the first taxable year in which a United States 
person marks to market its PFIC stock 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, prior to such first 
taxable year, during the United States person'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 United States person.
    (B) For the first taxable year of a United States person that marks 
to market its PFIC stock under any provision of chapter 1 of the 
Internal Revenue Code, other than section 1296, such United States 
person shall, in lieu of the rules under which the United States person 
marks to market, apply the rules of Sec.  1.1296-1(i)(2) and (3) as if 
the United States person had made an election under section 1296 for 
such first taxable year.
    (d) [Reserved].
* * * * *
    (f) through (i) [Reserved].
    (j) Effective dates. This section applies for taxable years 
beginning on or after May 3, 2004, except as otherwise provided in 
paragraph (e)(2) of this section.


Sec.  1.295-0  [Amended]

0
4. Sec.  1.1295-0 (table of contents) is amended by:
0
1. Revising the entries for Sec.  1.1295-1(i)(3) and (i)(4) and adding 
paragraph (i)(5), (i)(5)(i), and (i)(5)(ii).
0
2. Revising the entry for Sec.  1.1295-1(k).
    The revisions and addition read as follows:


Sec.  1.1295-0  Table of contents. * * *


Sec.  1.1295-1  Qualified electing funds.

* * * * *
    (i) * * *
    (3) Automatic termination.
    (4) Effect of invalidation, termination or revocation.
    (5) Election after invalidation, termination or revocation.
    (i) In general.
    (ii) Special rule.
* * * * *
    (k) Effective dates.
* * * * *


Sec.  1.1295-1  [Amended]

0
5. Section 1.1295-1 is amended by:
0
1. Redesignating paragraphs (i)(3) and (i)(4) as paragraphs (i)(4) and 
(i)(5), respectively.
0
2. Adding a new paragraph (i)(3).
0
3. Revising newly designated paragraph (i)(5).
0
4. Revising paragraph (k).
    The revisions and addition read as follows:


Sec.  1.1295-1  Qualified electing funds.

* * * * *
    (i) * * *
    (3) Automatic termination. If a United States person, or the United 
States shareholder on behalf of a controlled foreign corporation, makes 
an election pursuant to section 1296 and the regulations thereunder 
with respect to PFIC stock for which a QEF election is in effect, or 
marks to market such stock under another provision of chapter 1 of the 
Internal Revenue Code, the QEF election is automatically terminated 
with respect to such stock that is

[[Page 24074]]

marked to market under section 1296 or another provision of chapter 1 
of the Internal Revenue Code. Such termination shall be effective on 
the last day of the shareholder's taxable year preceding the first 
taxable year for which the section 1296 election is in effect or such 
stock is marked to market under another provision of chapter 1 of the 
Internal Revenue Code.

    Example. Corp Y, a domestic corporation, owns directly 100 
shares of marketable stock in foreign corporation FX, a PFIC. Corp Y 
also owns a 50 percent interest in FP, a foreign partnership that 
owns 200 shares of FX stock. Accordingly, under section 1298(a)(3) 
and Sec.  1.1296-1(e)(1), Corp Y is treated as indirectly owning 100 
shares of FX stock. Corp Y also owns 100 percent of the stock of FZ, 
a foreign corporation that is not a PFIC. FZ owns 100 shares of FX 
stock, and therefore under section 1298(a)(2)(A), Corp Y is treated 
as owning the 100 shares of FX stock owned by FZ. For taxable year 
2005, Corp Y has a QEF election in effect with respect to all 300 
shares of FX stock that it owns directly or indirectly. See 
generally Sec.  1.1295-1(c)(1). For taxable year 2006, Corp Y makes 
a timely election pursuant to section 1296 and the regulations 
thereunder. For purposes of section 1296, Corp Y is treated as 
owning stock held indirectly through a partnership, but not through 
a foreign corporation. Section 1296(g); Sec.  1.1296-1(e)(1). 
Accordingly, Corp Y's section 1296 election covers the 100 shares it 
owns directly and the 100 shares it owns indirectly through FP, but 
not the 100 shares owned by FZ. With respect to the first 200 
shares, Corp Y's QEF election is automatically terminated effective 
December 31, 2005. With respect to the 100 shares Corp Y owns 
through foreign FZ, Corp Y's QEF election remains in effect unless 
invalidated, terminated, or revoked pursuant to this paragraph (i).
* * * * *
    (5) Effect after invalidation, termination, or revocation--(i) In 
general. Without the Commissioner's consent, a shareholder whose 
section 1295 election was invalidated, terminated, or revoked under 
this paragraph (i) may not make the section 1295 election with respect 
to the PFIC before the sixth taxable year in which the invalidation, 
termination, or revocation became effective.
    (ii) Special rule. Notwithstanding paragraph (i)(5)(i) of this 
section, a shareholder whose section 1295 election was terminated 
pursuant to paragraph (i)(3) of this section, and either whose section 
1296 election has subsequently been terminated because its PFIC stock 
ceased to be marketable or who no longer marks to market such stock 
under another provision of chapter 1 of the Internal Revenue Code, may 
make a section 1295 election with respect to its PFIC stock before the 
sixth taxable year in which its prior section 1295 election was 
terminated.
* * * * *
    (k) Effective dates. Except as otherwise provided, paragraphs 
(b)(2)(iii), (b)(3), (b)(4), and (c) through (j) of this section are 
applicable to taxable years of shareholders beginning after December 
31, 1997. However, taxpayers may apply the rules under paragraphs 
(b)(4), (f) and (g) of this section to a taxable year beginning before 
January 1, 1998, provided the statute of limitations on the assessment 
of tax has not expired as of April 27, 1998, and, in the case of 
paragraph (b)(4) of this section, the taxpayers who filed the joint 
return have consistently applied the rules of that section to all 
taxable years following the year the election was made. Paragraph 
(b)(3)(v) of this section is applicable as of February 7, 2000, 
however, a taxpayer may apply the rules to a taxable year prior to the 
applicable date provided the statute of limitations on the assessment 
of tax for that taxable year has not expired. Paragraphs (i)(3) and 
(i)(5)(ii) of this section are applicable for taxable years beginning 
on or after May 3, 2004.


Sec.  1.1296-1  [Added]

0
6. Section 1.1296-1 is added to read as follows:


Sec.  1.1296-1  Mark to market election for marketable stock.

    (a) Definitions--(1) Eligible RIC. An eligible RIC is a regulated 
investment company that offers for sale, or has outstanding, any stock 
of which it is the issuer and which is redeemable at net asset value, 
or that publishes net asset valuations at least annually.
    (2) Section 1296 stock. The term section 1296 stock means 
marketable stock in a passive foreign investment company (PFIC), 
including any PFIC stock owned directly or indirectly by an eligible 
RIC, for which there is a valid section 1296 election. Section 1296 
stock does not include stock of a foreign corporation that previously 
had been a PFIC, and for which a section 1296 election remains in 
effect.
    (3) Unreversed inclusions--(i) General rule. The term unreversed 
inclusions means with respect to any section 1296 stock, the excess, if 
any, of--
    (A) The amount of mark to market gain included in gross income of 
the United States person under paragraph (c)(1) of this section with 
respect to such stock for prior taxable years; over
    (B) The amount allowed as a deduction to the United States person 
under paragraph (c)(3) of this section with respect to such stock for 
prior taxable years.
    (ii) Section 1291 adjustment. The amount referred to in paragraph 
(a)(3)(i)(A) of this section shall include any amount subject to 
section 1291 under the coordination rule of paragraph (i)(2)(ii) of 
this section.
    (iii) Example. An example of the computation of unreversed 
inclusions is as follows:

    Example. A, a United States person, acquired stock in Corp X, a 
foreign corporation, on January 1, 2005 for $150. At such time and 
at all times thereafter, Corp X was a PFIC and A's stock in Corp X 
was marketable. For taxable years 2005 and 2006, Corp X was a 
nonqualified fund subject to taxation under section 1291. A made a 
timely section 1296 election with respect to the X stock, effective 
for taxable year 2007. The fair market value of the X stock was $200 
as of December 31, 2006, and $240 as of December 31, 2007. 
Additionally, Corp X made no distribution with respect to its stock 
for the taxable years at issue. In 2007, pursuant to paragraph 
(i)(2)(ii) of this section, A must include the $90 gain in the X 
stock in accordance with the rules of section 1291 for purposes of 
determining the deferred tax amount and any applicable interest. 
Nonetheless, for purposes of determining the amount of the 
unreversed inclusions pursuant to paragraph (a)(3)(ii) of this 
section, A will include the $90 of gain that was taxed under section 
1291 and not the interest thereon.

    (iv) Special rule for regulated investment companies. In the case 
of a regulated investment company which had elected to mark to market 
the PFIC stock held by such company as of the last day of the taxable 
year preceding such company's first taxable year for which such company 
makes a section 1296 election, the amount referred to in paragraph 
(a)(3)(i)(A) of this section shall include amounts previously included 
in gross income by the company pursuant to such mark to market election 
with respect to such stock for prior taxable years. For further 
guidance, see Notice 92-53 (1992-2 C.B. 384) (see also 601.601(d)(2) of 
this chapter).
    (b) Application of section 1296 election--(1) In general. Any 
United States person and any controlled foreign corporation (CFC) that 
owns directly, or is treated as owning under this section, marketable 
stock, as defined in Sec.  1.1296-2, in a PFIC may make an election to 
mark to market such stock in accordance with the provisions of section 
1296 and this section.
    (2) Election applicable to specific United States person. A section 
1296 election applies only to the United States person (or CFC that is 
treated as a U.S. person under paragraph (g)(2) of this section) that 
makes the election. Accordingly, a United States person's

[[Page 24075]]

section 1296 election will not apply to a transferee of section 1296 
stock.
    (3) Election applicable to specific corporation only. A section 
1296 election is made with respect to a single foreign corporation, and 
thus a separate section 1296 election must be made for each foreign 
corporation that otherwise meets the requirements of this section. A 
United States person's section 1296 election with respect to stock in a 
foreign corporation applies to all marketable stock of the corporation 
that the person owns directly, or is treated as owning under paragraph 
(e) of this section, at the time of the election or that is 
subsequently acquired.
    (c) Effect of election--(1) Recognition of gain. If the fair market 
value of section 1296 stock on the last day of the United States 
person's taxable year exceeds its adjusted basis, the United States 
person shall include in gross income for its taxable year the excess of 
the fair market value of such stock over its adjusted basis (mark to 
market gain).
    (2) Character of gain. Mark to market gain, and any gain on the 
sale or other disposition of section 1296 stock, shall be treated as 
ordinary income.
    (3) Recognition of loss. If the adjusted basis of section 1296 
stock exceeds its fair market value on the last day of the United 
States person's taxable year, such person shall be allowed a deduction 
for such taxable year equal to the lesser of the amount of such excess 
or the unreversed inclusions with respect to such stock (mark to market 
loss).
    (4) Character of loss--(i) Losses not in excess of unreversed 
inclusions. Any mark to market loss allowed as a deduction under 
paragraph (c)(3) of this section, and any loss on the sale or other 
disposition of section 1296 stock, to the extent that such loss does 
not exceed the unreversed inclusions attributable to such stock, shall 
be treated as an ordinary loss, deductible in computing adjusted gross 
income.
    (ii) Losses in excess of unreversed inclusions. Any loss recognized 
on the sale or other disposition of section 1296 stock in excess of any 
prior unreversed inclusions will be subject to the rules generally 
applicable to losses provided elsewhere in the Internal Revenue Code 
and the regulations thereunder.
    (5) Application of election to separate lots of stock. In the case 
in which a United States person purchased or acquired shares of stock 
in a PFIC at different prices, the rules of this section shall be 
applied in a manner consistent with the rules of Sec.  1.1012-1.
    (6) Source rules. The source of any amount included in gross income 
under paragraph (c)(1) of this section, or the allocation and 
apportionment of any amount allowed as a deduction under paragraph 
(c)(3) of this section, shall be determined in the same manner as if 
such amounts were gain or loss (as the case may be) from the sale of 
stock in the PFIC.
    (7) Examples. The following examples illustrate this paragraph (c):

    Example 1. Treatment of gain as ordinary income. A, a United 
States individual, purchases stock in FX, a foreign corporation that 
is not a PFIC, in 1990 for $1,000. On January 1, 2005, when the fair 
market value of the FX stock is $1,100, FX becomes a PFIC. A makes a 
timely section 1296 election for taxable year 2005. On December 31, 
2005, the fair market value of the FX stock is $1,200. For taxable 
year 2005, A includes $200 of mark to market gain (the excess of the 
fair market value of FX stock ($1,200) over A's adjusted basis 
($1,000)) in gross income as ordinary income and pursuant to 
paragraph (d)(1) of this section increases his basis in the FX stock 
by that amount.
    Example 2. Treatment of gain as capital gain. The facts are the 
same as in Example 1. For taxable year 2006, FX does not satisfy 
either the asset test or the income test of section 1297(a). A does 
not revoke the section 1296 election it made with respect to the FX 
stock. On December 1, 2006, A sells the FX stock when the fair 
market value of the stock is $1,500. For taxable year 2006, A 
includes $300 of gain (the excess of the fair market value of FX 
stock ($1,500) over A's adjusted basis ($1,200)) in gross income as 
long-term capital gain because at the time of sale of the FX stock 
by A, FX did not qualify as a PFIC, and, therefore, the FX stock was 
not section 1296 stock at the time of the disposition. Further, A's 
holding period for non-PFIC purposes was more than one year.
    Example 3. Treatment of losses as ordinary where they do not 
exceed unreversed inclusions. The facts are the same as in Example 
1. On December 1, 2006, A sells the stock in FX for $1,100. At that 
time, A's unreversed inclusions (the amount A included in income as 
mark to market gain) with respect to the stock in FX are $200. 
Accordingly, for taxable year 2006, A recognizes a loss on the sale 
of the FX stock of $100, (the fair market value of the FX stock 
($1,100) minus A's adjusted basis ($1,200) in the stock) that is 
treated as an ordinary loss because the loss does not exceed the 
unreversed inclusions attributable to the stock of FX.
    Example 4. Treatment of losses as long-term capital losses. The 
facts are the same as in Example 3, except that FX does not satisfy 
either the asset test or the income test of section 1297(a) for 
taxable year 2006. For taxable year 2006, A's $100 loss from the 
sale of the FX stock is treated as long-term capital loss because at 
the time of the sale of the FX stock by A FX did not qualify as a 
PFIC, and, therefore, the FX stock was not section 1296 stock at the 
time of the disposition. Further, A's holding period in the FX stock 
for non-PFIC purposes was more than one year.
    Example 5. Long-term capital loss treatment of losses in excess 
of unreversed inclusions. The facts are the same as in Example 3, 
except that A sells his FX stock for $900. At the time of A's sale 
of the FX stock on December 1, 2006, A's unreversed inclusions with 
respect to the FX stock are $200. Accordingly, the $300 loss 
recognized by A on the disposition is treated as an ordinary loss to 
the extent of his unreversed inclusions ($200). The amount of the 
loss in excess of A's unreversed inclusions ($100) will be treated 
as a long-term capital loss because A's holding period in the FC 
stock for non-PFIC purposes was more than one year.
    Example 6. Application of section 1296 election to separate lots 
of stock. On January 1, 2005, Corp A, a domestic corporation, 
purchased 100 shares (first lot) of stock in FX, a PFIC, for $500 
($5 per share). On June 1, 2005, Corp A purchased 100 shares (second 
lot) of FX stock for $1,000 ($10 per share). Corp A made a timely 
section 1296 election with respect to its FX stock for taxable year 
2005. On December 31, 2005, the fair market value of FX stock was $8 
per share. For taxable year 2005, Corp A includes $300 of gain in 
gross income as ordinary income under paragraph (c)(1) of this 
section with respect to the first lot, and adjusts its basis in that 
lot to $800 pursuant to paragraph (d)(1) of this section. With 
respect to the second lot, Corp A is not permitted to recognize a 
loss under paragraph (c)(3) of this section for taxable year 2005. 
Although Corp A's adjusted basis in that stock exceeds its fair 
market value by $200, Corp A has no unreversed inclusions with 
respect to that particular lot of stock. On July 1, 2006, Corp A 
sells 100 shares of FX stock for $900. Assuming that Corp A 
adequately identifies (in accordance with the rules of Sec.  1.1012-
1(c)) the shares of FX stock sold as being from the second lot, Corp 
A recognizes $100 of long term capital loss pursuant to paragraph 
(c)(4)(ii) of this section.

    (d) Adjustment to basis--(1) Stock held directly. The adjusted 
basis of the section 1296 stock shall be increased by the amount 
included in the gross income of the United States person under 
paragraph (c)(1) of this section with respect to such stock, and 
decreased by the amount allowed as a deduction to the United States 
person under paragraph (c)(3) of this section with respect to such 
stock.
    (2) Stock owned through certain foreign entities. (i) In the case 
of section 1296 stock that a United States person is treated as owning 
through certain foreign entities pursuant to paragraph (e) of this 
section, the basis adjustments under paragraph (d)(1) of this section 
shall apply to such stock in the hands of the foreign entity actually 
holding such stock, but only for purposes of determining the subsequent 
treatment under chapter 1 of the Internal Revenue Code of the United 
States person with respect to such stock. Such increase or decrease in 
the adjusted basis of the section 1296 stock shall constitute an 
adjustment to the basis of partnership property only with respect to 
the

[[Page 24076]]

partner making the section 1296 election. Corresponding adjustments 
shall be made to the adjusted basis of the United States person's 
interest in the foreign entity and in any intermediary entity described 
in paragraph (e) of this section through which the United States person 
holds the PFIC stock.
    (ii) Example. The following example illustrates this paragraph 
(d)(2):

    Example. FP is a foreign partnership. Corp A, a domestic 
corporation, owns a 20 percent interest in FP. Corp B, a domestic 
corporation, owns a 30 percent interest in FP. Corp C, a foreign 
corporation, with no direct or indirect shareholders that are U.S. 
persons, owns a 50% interest in FP. Corp A, Corp B, and FP all use a 
calendar year for their taxable year. In 2005, FP purchases stock in 
FX, a foreign corporation and a PFIC, for $1,000. Corp A makes a 
timely section 1296 election for taxable year 2005. On December 31, 
2005, the fair market value of the PFIC stock is $1,100. Corp A 
includes $20 of ordinary income in taxable year 2005 under 
paragraphs (c)(1) and (2) of this section. Corp A increases its 
basis in its FP partnership interest by $20. FP increases its basis 
in the FX stock to $1,020 solely for purposes of determining the 
subsequent treatment of Corp A, under chapter 1 of the Internal 
Revenue Code, with respect to such stock. In 2006, FP sells the FX 
stock for $1,200. For purposes of determining the amount of gain of 
Corp A, FP will be treated as having $180 in gain of which $20 is 
allocated to Corp A. Corp A's $20 of gain will be treated as 
ordinary income under paragraph (c)(2) of this section. For purposes 
of determining the amount of gain attributable to Corp B, FP will be 
treated as having $200 gain, $60 of which will be allocated to Corp 
B.

    (3) Stock owned indirectly by an eligible RIC. Paragraph (d)(2) of 
this section shall also apply to an eligible RIC which is an indirect 
shareholder under Sec.  1.1296-2(f) of stock in a PFIC and has a valid 
section 1296 election in effect with respect to the PFIC stock.
    (4) Stock acquired from a decedent. In the case of stock of a PFIC 
which is acquired by bequest, devise, or inheritance (or by the 
decedent's estate) and with respect to which a section 1296 election 
was in effect as of the date of the decedent's death, notwithstanding 
section 1014, the basis of such stock in the hands of the person so 
acquiring it shall be the adjusted basis of such stock in the hands of 
the decedent immediately before his death (or, if lesser, the basis 
which would have been determined under section 1014 without regard to 
this paragraph).
    (5) Transition rule for individuals becoming subject to United 
States income taxation--(i) In general. If any individual becomes a 
United States person in a taxable year beginning after December 31, 
1997, solely for purposes of this section, the adjusted basis, before 
adjustments under this paragraph (d), of any section 1296 stock owned 
by such individual on the first day of such taxable year shall be 
treated as being the greater of its fair market value or its adjusted 
basis on such first day.
    (ii) An example of the transition rule for individuals becoming 
subject to United States income taxation is as follows:

    Example. A, a nonresident alien individual, purchases marketable 
stock in FX, a PFIC, for $50 in 1995. On January 1, 2005, A becomes 
a United States person and makes a timely section 1296 election with 
respect to the stock in accordance with paragraph (h) of this 
section. The fair market value of the FX stock on January 1, 2005, 
is $100. The fair market value of the FX stock on December 31, 2005, 
is $110. Under paragraph (d)(5)(i) of this section, A computes the 
amount of mark to market gain or loss for the FX stock in 2005 by 
reference to an adjusted basis of $100, and therefore A includes $10 
in gross income as mark to market gain under paragraph (c)(1) of 
this section. Additionally, under paragraph (d)(1) of this section, 
A's adjusted basis in the FX stock for purposes of this section is 
increased to $110 (and to $60 for all other tax purposes). A sells 
the FX stock in 2006 for $120. For purposes of applying section 
1001, A must use its original basis of $50, with any adjustments 
under paragraph (d)(1) of this section, $10 in this case, and 
therefore A recognizes $60 of gain. Under paragraph (c)(2) of this 
section (which is applied using an adjusted basis of $110), $10 of 
such gain is treated as ordinary income. The remaining $50 of gain 
from the sale of the FX stock is long term capital gain because A 
held such stock for more than one year.

    (e) Stock owned through certain foreign entities--(1) In general. 
Except as provided in paragraph (e)(2) of this section, the following 
rules shall apply in determining stock ownership for purposes of this 
section. PFIC stock owned, directly or indirectly, by or for a foreign 
partnership, foreign trust (other than a foreign trust described in 
sections 671 through 679), or foreign estate shall be considered as 
being owned proportionately by its partners or beneficiaries. PFIC 
stock owned, directly or indirectly, by or for a foreign trust 
described in sections 671 through 679 shall be considered as being 
owned proportionately by its grantors or other persons treated as 
owners under sections 671 through 679 of any portion of the trust that 
includes the stock. The determination of a person's proportionate 
interest in a foreign partnership, foreign trust or foreign estate will 
be made on the basis of all the facts and circumstances. Stock 
considered owned by reason of this paragraph shall, for purposes of 
applying the rules of this section, be treated as actually owned by 
such person.
    (2) Stock owned indirectly by eligible RICs. The rules for 
attributing ownership of stock contained in Sec.  1.1296-2(f) will 
apply to determine the indirect ownership of PFIC stock by an eligible 
RIC.
    (f) Holding period. Solely for purposes of sections 1291 through 
1298, if section 1296 applied to stock with respect to the taxpayer for 
any prior taxable year, the taxpayer's holding period in such stock 
shall be treated as beginning on the first day of the first taxable 
year beginning after the last taxable year for which section 1296 so 
applied.
    (g) Special rules--(1) Certain dispositions of stock. To the extent 
a United States person is treated as actually owning stock in a PFIC 
under paragraph (e) of this section, any disposition which results in 
the United States person being treated as no longer owning such stock, 
and any disposition by the person owning such stock, shall be treated 
as a disposition by the United States person of the stock in the PFIC.
    (2) Treatment of CFC as a United States person. In the case of a 
CFC that owns, or is treated as owning under paragraph (e) of this 
section, section 1296 stock:
    (i) Other than with respect to the sourcing rules in paragraph 
(c)(6) of this section, this section shall apply to the CFC in the same 
manner as if such corporation were a United States person. The CFC will 
be treated as a foreign person for purposes of applying the source 
rules of paragraph (c)(6).
    (ii) For purposes of subpart F of part III of subchapter N of the 
Internal Revenue Code--
    (A) Amounts included in the CFC's gross income under paragraph 
(c)(1) or (i)(2)(ii) of this section shall be treated as foreign 
personal holding company income under section 954(c)(1)(A); and
    (B) Amounts allowed as a deduction under paragraph (c)(3) of this 
section shall be treated as a deduction allocable to foreign personal 
holding company income for purposes of computing net foreign base 
company income under Sec.  1.954-1(c).
    (iii) A United States shareholder, as defined in section 951(b), of 
the CFC shall not be subject to section 1291 with respect to any stock 
of the PFIC for the period during which the section 1296 election is in 
effect for that stock, and the holding period rule of paragraph (f) of 
this section shall apply to such United States shareholder.
    (iv) The rules of this paragraph (g)(2) shall not apply to a United 
States person that is a shareholder of the PFIC for purposes of section 
1291, but is not a

[[Page 24077]]

United States shareholder under section 951(b) with respect to the CFC 
making a section 1296 election.
    (3) Timing of inclusions for stock owned through certain foreign 
entities. In the case of section 1296 stock that a United States person 
is treated as owning through certain foreign entities pursuant to 
paragraph (e) of this section, the mark to market gain or mark to 
market loss is determined in accordance with paragraphs (c) and 
(i)(2)(ii) of this section as of the last day of the taxable year of 
the foreign partnership, foreign trust or foreign estate and then 
included in the taxable year of such United States person that includes 
the last day of the taxable year of the entity.
    (h) Elections--(1) Timing and manner for making a section 1296 
election--(i) United States persons. A United States person that owns 
marketable stock in a PFIC, or is treated as owning marketable stock 
under paragraph (e) of this section, on the last day of the taxable 
year of such person, and that wants to make a section 1296 election, 
must make a section 1296 election for such taxable year on or before 
the due date (including extensions) of the United States person's 
income tax return for that year. The section 1296 election must be made 
on the Form 8621, ``Return by a Shareholder of a Passive Foreign 
Investment Company or Qualified Electing Fund'', included with the 
original tax return of the United States person for that year, or on an 
amended return, provided that the amended return is filed on or before 
the election due date.
    (ii) Controlled foreign corporations. A section 1296 election by a 
CFC shall be made by its controlling United States shareholders, as 
defined in Sec.  1.964-1(c)(5), and shall be included with the Form 
5471, ``Information Return of U.S. Persons With Respect To Certain 
Foreign Corporations'', for that CFC by the due date (including 
extensions) of the original income tax returns of the controlling 
United States shareholders for that year. A section 1296 election by a 
CFC shall be binding on all United States shareholders of the CFC.
    (iii) Retroactive elections for PFIC stock held in prior years. A 
late section 1296 election may be permitted only in accordance with 
Sec.  301.9100 of this chapter.
    (2) Effect of section 1296 election--(i) A section 1296 election 
will apply to the taxable year for which such election is made and 
remain in effect for each succeeding taxable year unless such election 
is revoked or terminated pursuant to paragraph (h)(3) of this section.
    (ii) Cessation of a foreign corporation as a PFIC. A United States 
person will not include mark to market gain or loss pursuant to 
paragraph (c) of this section with respect to any stock of a foreign 
corporation for any taxable year that such foreign corporation is not a 
PFIC under section 1297 or treated as a PFIC under section 1298(b)(1) 
(taking into account the holding period rule of paragraph (f) of this 
section). Cessation of a foreign corporation's status as a PFIC will 
not, however, terminate a section 1296 election. Thus, if a foreign 
corporation is a PFIC in a taxable year after a year in which it is not 
treated as a PFIC, the United States person's original election (unless 
revoked or terminated in accordance with paragraph (h)(3) of this 
section) continues to apply and the shareholder must include any mark 
to market gain or loss in such year.
    (3) Revocation or termination of election--(i) In general. A United 
States person's section 1296 election is terminated if the section 1296 
stock ceases to be marketable; if the United States person elects, or 
is required, to mark to market the section 1296 stock under another 
provision of chapter 1 of the Internal Revenue Code; or if the 
Commissioner, in the Commissioner's discretion, consents to the United 
States person's request to revoke its section 1296 election upon a 
finding of a substantial change in circumstances. A substantial change 
in circumstances for this purpose may include a foreign corporation 
ceasing to be a PFIC.
    (ii) Timing of termination or revocation. Where a section 1296 
election is terminated automatically (e.g., the stock ceases to be 
marketable), section 1296 will cease to apply beginning with the 
taxable year in which such termination occurs. Where a section 1296 
election is revoked with the consent of the Commissioner, section 1296 
will cease to apply beginning with the first taxable year of the United 
States person after the revocation is granted unless otherwise provided 
by the Commissioner.
    (4) Examples. The operation of the rules of this paragraph (h) is 
illustrated by the following examples:

    Example 1. A, a United States person, owns stock in FX, a PFIC. 
A makes a QEF election in 1996 with respect to the FX stock. For 
taxable year 2005, A makes a timely section 1296 election with 
respect to its stock, and thus its QEF election is automatically 
terminated pursuant to Sec.  1.1295-1(i)(3). In 2006, A's stock in 
FX ceases to be marketable, and therefore its section 1296 election 
is automatically terminated under paragraph (h)(3) of this section. 
Beginning with taxable year 2006, A is subject to the rules of 
section 1291 with respect to its FX stock unless it makes a new QEF 
election. See Sec.  1.1295-1(i)(5).
    Example 2. The facts are the same as in Example 1, except that 
A's stock in FX becomes marketable again in 2007. A may make a new 
section 1296 election with respect to the FX stock for its taxable 
year 2007, or thereafter. A will be subject to the coordination 
rules under paragraph (i) of this section unless it made a new QEF 
election in 2006.

    (i) Coordination rules for first year of election--(1) In general. 
Notwithstanding any provision in this section to the contrary, the 
rules of this paragraph (i) shall apply to the first taxable year in 
which a section 1296 election is effective with respect to marketable 
stock of a PFIC if such foreign corporation was a PFIC for any taxable 
year, prior to such first taxable year, during the United States 
person's holding period (as defined in paragraph (f) of this section) 
in such stock, and for which such corporation was not treated as a QEF 
with respect to such United States person.
    (2) Shareholders other than regulated investment companies. For the 
first taxable year of a United States person (other than a regulated 
investment company) for which a section 1296 election is in effect with 
respect to the stock of a PFIC, such United States person shall, in 
lieu of the rules of paragraphs (c) and (d) of this section--
    (i) Apply the rules of section 1291 to any distributions with 
respect to, or disposition of, section 1296 stock;
    (ii) Apply section 1291 to the amount of the excess, if any, of the 
fair market value of such section 1296 stock on the last day of the 
United States person's taxable year over its adjusted basis, as if such 
amount were gain recognized from the disposition of stock on the last 
day of the taxpayer's taxable year; and
    (iii) Increase its adjusted basis in the section 1296 stock by the 
amount of excess, if any, subject to section 1291 under paragraph 
(i)(2)(ii) of this section.
    (3) Shareholders that are regulated investment companies. For the 
first taxable year of a regulated investment company for which a 
section 1296 election is in effect with respect to the stock of a PFIC, 
such regulated investment company shall increase its tax under section 
852 by the amount of interest that would have been imposed under 
section 1291(c)(3) for such taxable year if such regulated investment 
company were subject to the rules of paragraph (i)(2) of this section, 
and not this paragraph (i)(3). No deduction or increase in basis shall 
be allowed for the increase in tax imposed under this paragraph (i)(3).

[[Page 24078]]

    (4) The operation of the rules of this paragraph (i) is illustrated 
by the following examples:

    Example (1). A, a United States person and a calendar year 
taxpayer, owns marketable stock in FX, a PFIC that it acquired on 
January 1, 1992. At all times, A's FX stock was a nonqualified fund 
subject to taxation under section 1291. A made a timely section 1296 
election effective for taxable year 2005. At the close of taxable 
year 2005, the fair market value of A's FX stock exceeded its 
adjusted basis by $10. Pursuant to paragraph (i)(2)(ii) of this 
section, A must treat the $10 gain under section 1291 as if the FX 
stock were disposed of on December 31, 2005. Further, A increases 
its adjusted basis in the FX stock by the $10 in accordance with 
paragraph (i)(2)(iii) of this section.
    Example (2). Assume the same facts as in Example (1), except 
that A is a RIC that had not made an election prior to 2005 to mark 
to market the PFIC stock. In taxable year 2005, A includes $10 of 
ordinary income under paragraph (c)(1) of this section, and such 
amount is not subject to section 1291. A also increases its tax 
imposed under section 852 by the amount of interest that would have 
been determined under section 1291(c)(3), and no deduction is 
permitted for such amount. Finally, under paragraph (d)(1) of this 
section, A increases its adjusted basis in the FX stock by $10.

    (j) Effective date. The provisions in this section are applicable 
for taxable years beginning on or after May 3, 2004.

0
7. Section 1.1296(e)-1 is redesignated as Sec.  1.1296-2 and amended 
by:
0
1. Revising paragraph (b)(2).
0
2. Adding paragraph (b)(3).
0
3. Revising both references to ``sections 958(a)(1) and (2)'' in 
paragraph (f)(1) to read ``section 1298(a)''.
    The revisions and addition read as follows:


Sec.  1.1296-2  Definition of marketable stock.

* * * * *
    (b) * * *
    (2) Special rule for year of initial public offering. For the 
calendar year in which a corporation initiates a public offering of a 
class of stock for trading on one or more qualified exchanges or other 
markets, as defined in paragraph (c) of this section, such class of 
stock meets the requirements of paragraph (b)(1) of this section for 
such year if the stock is regularly traded on such exchanges or 
markets, other than in de minimis quantities, on 1/6 of the days 
remaining in the quarter in which the offering occurs, and on at least 
15 days during each remaining quarter of the taxpayer's calendar year. 
In cases where a corporation initiates a public offering of a class of 
stock in the fourth quarter of the calendar year, such class of stock 
meets the requirements of paragraph (b)(1) of this section in the 
calendar year of the offering if the stock is regularly traded on such 
exchanges or markets, other than in de minimis quantities, on the 
greater of 1/6 of the days remaining in the quarter in which the 
offering occurs, or 5 days.
    (3) Anti-abuse rule. Trades that have as one of their principal 
purposes the meeting of the trading requirements of paragraph (b)(1) or 
(2) of this section shall be disregarded. Further, a class of stock 
shall not be treated as meeting the trading requirement of paragraph 
(b)(1) or (2) of this section if there is a pattern of trades conducted 
to meet the requirement of paragraph (b)(1) or (2) of this section. 
Similarly, paragraph (b)(2) of this section shall not apply to a public 
offering of stock that has as one of its principal purposes to avail 
itself of the reduced trading requirements under the special rule for 
the calendar year of an initial public offering. For purposes of 
applying the immediately preceding sentence, consideration will be 
given to whether the trading requirements of paragraph (b)(1) of this 
section are satisfied in the subsequent calendar year.
* * * * *


Sec.  1.6031(a)-1  [Amended]

0
8. Section 1.6031(a)-1 is amended by:
0
1. Redesignating the text of paragraph (b)(1) as (b)(1)(i).
0
2. Adding a heading to newly designated paragraph (b)(1)(i).
0
3. Adding paragraph (b)(1)(ii).
    The additions read as follows:


Sec.  1.6031(a)-1  Return of partnership income.

* * * * *
    (b) * * * (1) * * * (i) Filing requirement. * * *
    (ii) Special rule. For purposes of this paragraph (b)(1) and 
paragraph (b)(3)(iii) of this section, a foreign partnership will not 
be considered to have derived income from sources within the United 
States solely because a U.S. partner marks to market his pro rata share 
of PFIC stock held by the foreign partnership pursuant to an election 
under section 1296.
* * * * *

Mark E. Matthews,
Deputy Commissioner of Services and Enforcement.

    Approved: April 7, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-9645 Filed 4-30-04; 8:45 am]
BILLING CODE 4830-01-P