In Notice 2014-28, 2014-18 IRB, IRS has announced that it will amend the regs under Code Sec. 1291 to provide that a U.S. person that owns stock of a passive foreign investment company (PFIC) through a tax-exempt organization or account will not be treated as a shareholder of the PFIC.
Code Sec. 1291 imposes a special tax and interest charge on a U.S. person that is a shareholder of a PFIC and receives an excess distribution (defined in Code Sec. 1291(b) from the PFIC or recognizes gain derived from a disposition of the PFIC that is treated as an excess distribution under Code Sec. 1291(a)(2).
Code Sec. 1298(a) sets forth attribution rules that treat a U.S. person as the owner of PFIC stock that is owned by another person. The Code Sec. 1298(a) attribution rules will not apply to treat stock owned (or treated as owned) by a U.S. person as owned by any other person, except to the extent provided in regs. (Code Sec. 1298(a)(1)(B)).
Neither the Code nor the section 1291 regulations provide specific guidance on the application of section 1291 to a U.S. person that owns stock of a PFIC through a tax exempt organization or account, other than an employees’ trust described in section 401(a) that is exempt from tax under section 501(a) (section 401(a) trust). The attribution rules that generally apply to treat a U.S. beneficiary of a nongrantor trust as owning PFIC stock owned by the trust do not apply to a U.S. person that owns an interest in a section 401(a) trust. §1.1291-1T(b)(8)(iii)(C). Thus, a U.S. person that is a beneficiary of a section 401(a) trust is not treated as an indirect shareholder with respect to
any PFIC stock held by the trust for purposes of section 1291.
Although §1.1291-1(e) provides that organizations exempt from tax under chapter 1 of the Code generally are not subject to section 1291 with respect to their direct or indirect ownership of PFIC stock, a U.S. person that is a beneficiary of or has an interest in a tax exempt organization or account may be treated as a direct or indirect shareholder of the PFIC stock owned by the organization or account under §1.1291-1T(b)(7) and (8), and thus may be subject to taxation under section 1291.
The Treasury Department and the IRS believe that the application of the PFIC rules to a U.S. person treated as owning stock of a PFIC through a tax exempt organization or account described in §1.1298-1T(c)(1) would be inconsistent with the tax policies underlying the PFIC rules and the tax provisions applicable to tax exempt organizations and accounts.
For example, applying the PFIC rules to a U.S. person that is treated as a shareholder of a PFIC through the U.S. person’s ownership of an individual retirement account (IRA) described in section 408(a) that owns stock of a PFIC would be inconsistent with the principle of deferred taxation provided by IRAs.
Accordingly, the Treasury Department and the IRS will amend the definition of shareholder in the section 1291 regulations to provide that a U.S. person that owns stock of a PFIC through a tax exempt organization or account (as described in §1.1298-1T(c)(1)) is not treated as a shareholder of the PFIC. This amendment will affect all regulations that cross-reference the §1.1291-1T(b)(7) and (8) definitions of shareholder and indirect shareholder, including §1.1298-1T(a).
The regulations incorporating the guidance described in this notice will be effective for taxable years of U.S. persons that own stock of a PFIC through a tax exempt organization or account ending on or after December 31, 2013.
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