§ 1291. Interest on tax deferral
(a)
Treatment of distributions and stock dispositions
(1)
Distributions
If a United States person receives an excess distribution in respect of stock in a passive foreign investment company, then—
(A)
the amount of the excess distribution shall be allocated ratably to each day in the taxpayer’s holding period for the stock,
(2)
Dispositions
If the taxpayer disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution.
(3)
Definitions
For purposes of this section—
(A)
Holding period
The taxpayer’s holding period shall be determined under section
1223; except that—
(b)
Excess distribution
(1)
In general
For purposes of this section, the term “excess distribution” means any distribution in respect of stock received during any taxable year to the extent such distribution does not exceed its ratable portion of the total excess distribution (if any) for such taxable year.
(2)
Total excess distribution
For purposes of this subsection—
(A)
In general
The term “total excess distribution” means the excess (if any) of—
(i)
the amount of the distributions in respect of the stock received by the taxpayer during the taxable year, over
(ii)
125 percent of the average amount received in respect of such stock by the taxpayer during the 3 preceding taxable years (or, if shorter, the portion of the taxpayer’s holding period before the taxable year).
For purposes of clause (ii), any excess distribution received during such 3-year period shall be taken into account only to the extent it was included in gross income under subsection (a)(1)(B).
(3)
Adjustments
Under regulations prescribed by the Secretary—
(A)
determinations under this subsection shall be made on a share-by-share basis, except that shares with the same holding period may be aggregated,
(C)
if the taxpayer does not hold the stock during the entire taxable year, distributions received during such year shall be annualized,
(D)
if the taxpayer’s holding period includes periods during which the stock was held by another person, distributions received by such other person shall be taken into account as if received by the taxpayer,
(E)
if the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency and the amount of any excess distribution determined in such currency shall be translated into dollars,
(c)
Deferred tax amount
For purposes of this section—
(1)
In general
The term “deferred tax amount” means, with respect to any distribution or disposition to which subsection (a) applies, an amount equal to the sum of—
(B)
the aggregate amount of interest (determined in the manner provided under paragraph (3)) on such increases in tax.
Any increase in the tax imposed by this chapter for the current year under subsection (a) to the extent attributable to the amount referred to in subparagraph (B) shall be treated as interest paid under section
6601 on the due date for the current year.
(2)
Aggregate increases in taxes
For purposes of paragraph (1)(A), the aggregate increases in taxes shall be determined by multiplying each amount allocated under subsection (a)(1)(A) to any taxable year (other than any taxable year referred to in subsection (a)(1)(B)) by the highest rate of tax in effect for such taxable year under section
1 or
11, whichever applies.
(3)
Computation of interest
(A)
In general
The amount of interest referred to in paragraph (1)(B) on any increase determined under paragraph (2) for any taxable year shall be determined for the period—
(ii)
ending on the due date for the taxable year with or within which the distribution or disposition occurs,
by using the rates and method applicable under section
6621 for underpayments of tax for such period.
(d)
Coordination with subparts B and C
(1)
In general
This section shall not apply with respect to any distribution paid by a passive foreign investment company, or any disposition of stock in a passive foreign investment company, if such company is a qualified electing fund with respect to the taxpayer for each of its taxable years—
(A)
which begins after December 31, 1986, and for which such company is a passive foreign investment company, and
Except as provided in section
1296
(j), this section also shall not apply if an election under section
1296
(k) is in effect for the taxpayer’s taxable year. In the case of stock which is marked to market under section
475 or any other provision of this chapter, this section shall not apply, except that rules similar to the rules of section
1296
(j) shall apply.
(2)
Election to recognize gain where company becomes qualified electing fund
(A)
In general
If—
(i)
a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986,
(iii)
the taxpayer establishes to the satisfaction of the Secretary the fair market value of such stock on such first day,
the taxpayer may elect to recognize gain as if he sold such stock on such first day for such fair market value.
(B)
Additional election for shareholder of controlled foreign corporations
(i)
In general
If—
(I)
a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986,
the taxpayer may elect to include in gross income as a dividend received on such first day an amount equal to the portion of the post-1986 earnings and profits of such company attributable (under regulations prescribed by the Secretary) to the stock in such company held by the taxpayer on such first day. The amount treated as a dividend under the preceding sentence shall be treated as an excess distribution and shall be allocated under subsection (a)(1)(A) only to days during periods taken into account in determining the post-1986 earnings and profits so attributable.
(ii)
Post-1986 earnings and profits
For purposes of clause (i), the term “post-1986 earnings and profits” means earnings and profits which were accumulated in taxable years of such company beginning after December 31, 1986, and during the period or periods the stock was held by the taxpayer while the company was a passive foreign investment company.
(e)
Certain basis, etc., rules made applicable
Except to the extent inconsistent with the regulations prescribed under subsection (f), rules similar to the rules of subsections (c) and (d) (e),[1] of section
1246 (as in effect on the day before the date of the enactment of the American Jobs Creation Act of 2004) shall apply for purposes of this section; except that—
(1)
the reduction under subsection (e) of such section shall be the excess of the basis determined under section
1014 over the adjusted basis of the stock immediately before the decedent’s death, and
(f)
Recognition of gain
To the extent provided in regulations, in the case of any transfer of stock in a passive foreign investment company where (but for this subsection) there is not full recognition of gain, the excess (if any) of—
shall be treated as gain from the sale or exchange of such stock and shall be recognized notwithstanding any provision of law. Proper adjustment shall be made to the basis of any such stock for gain recognized under the preceding sentence.
(g)
Coordination with foreign tax credit rules
(1)
In general
If there are creditable foreign taxes with respect to any distribution in respect of stock in a passive foreign investment company—
(A)
the amount of such distribution shall be determined for purposes of this section with regard to section
78,
(B)
the excess distribution taxes shall be allocated ratably to each day in the taxpayer’s holding period for the stock, and
(C)
to the extent—
(i)
that such excess distribution taxes are allocated to a taxable year referred to in subsection (a)(1)(B), such taxes shall be taken into account under section
901 for the current year, and
(ii)
that such excess distribution taxes are allocated to any other taxable year, such taxes shall reduce (subject to the principles of section
904
(d) and not below zero) the increase in tax determined under subsection (c)(2) for such taxable year by reason of such distribution (but such taxes shall not be taken into account under section
901).
(2)
Definitions
For purposes of this subsection—
(A)
Creditable foreign taxes
The term “creditable foreign taxes” means, with respect to any distribution—
(B)
Excess distribution taxes
The term “excess distribution taxes” means, with respect to any distribution, the portion of the creditable foreign taxes with respect to such distribution which is attributable (on a pro rata basis) to the portion of such distribution which is an excess distribution.
(C)
Section
1248 gain
The rules of this subsection also shall apply in the case of any gain which but for this section would be includible in gross income as a dividend under section
1248.
[1] So in original. See 2010 Amendment notes below.