(a) In general.—Notwithstanding section 301 and the regulations under that section, a shareholder is subject to the
rules of section 1291, this section, and § 1.1291-4 with respect to a distribution (including an
indirect distribution as defined in paragraph (f) of this section) by a section 1291 fund, if any
portion of such distribution is an excess distribution. An excess distribution is defined in
paragraph (c)(1) of this section. Under paragraph (e)(2)(i) of this section, the excess distribution
is allocated ratably over the shareholder’s holding period of the stock of the section 1291 fund.
The portions of the excess distribution allocated to the current shareholder year and to prePFIC
years are included in the shareholder’s gross income as ordinary income in the current share-
holder year under paragraph (e)(2)(ii) of this section. The portions of the excess distribution
allocated to prior PFIC years are not included in the shareholder’s gross income pursuant to
paragraph (e)(2)(iii) of this section. Instead, the shareholder incurs tax plus interest (the deferred
tax amount) on those portions of the excess distribution, as provided in § 1.1291-4.
(b) Distribution.—
(1) In general.—For purposes of section 1291 and these regulations,
unless otherwise provided in this paragraph (b), a distribution is any actual or constructive
transfer of money or property by a section 1291 fund with respect to its stock. For example, a
distribution includes a transfer of stock taxable pursuant to section 305(b) and (c), a transfer in
redemption of stock taxable under section 301 pursuant to section 302(d), and an amount treated
as a dividend under section 78. A distribution, however, does not include a transfer that qualifies
under section 305(a) or 355(a). Transfers with respect to stock that are treated as dispositions of
the stock under § 1.1291-3 are not treated as distributions under this section. For transfers with
respect to stock (including transfers that qualify under section 355(a)) that are treated as
dispositions, see § 1.1291-3.
(2) Coordination with current inclusion rules.—
(i) Deemed dividend or income inclusions;
distributions of previously taxed amounts.—Amounts included in gross income under section
551(a), 951(a), or 1293(a), and transfers of amounts not included in gross income by reason of
section 551(d), 959, or 1293(c), are not treated as distributions for purposes of this section. The
following example illustrates the rule of this paragraph (b)(2)(i).
Example.
USP, a domestic corporation, purchased in 1989 10 percent of the stock of
FC, a section 1291 fund that also is a CFC. Both USP and FC use the calendar year as their taxable
year. In 1989, USP, pursuant to section 951(a)(1), included in income $100 of subpart F income of
FC, none of which was distributed in 1989. The $100 of subpart F income is not treated as a
distribution taxable under section 1291. In 1990, FC did not have any subpart F income. In that
year, FC distributed $200 to USP. Of the $200 distribution, $100 had been previously taxed to USP.
Because $100 of the $200 distribution is not included in gross income by reason of section 959,
pursuant to § 1.1291-2(b)(2) that amount is not treated as a distribution for purposes of
§ 1.1291-2(c)(2)(i). Therefore, the total distribution, for purposes of calculating the excess distribution for 1990, is $100.
(ii) Other rules.—For treatment of amounts that would be taxable in the same
taxable year under section 951(a) or 1293(a) and section 1291, see § § 1.1291-2(f)(3) and
1.1291-3(e)(4)(ii).
(3) Section 304 transactions.—
(i) In general.—If, in a transaction described in section
304(a), the issuing corporation is a section 1291 fund, any amount treated as paid out of the
earnings and profits of such section 1291 fund by virtue of section 304(b)(2) is treated as an
excess distribution by such fund for purposes of section 1291 and this section. In addition, the
transfer of the stock of such fund will be treated as a disposition to which § § 1.1291-3 and 1.1291-6
apply. If, in a transaction described in section 304(a), the acquiring corporation is a section 1291
fund, any amount paid by such corporation to the transferor is treated as a distribution by such
fund (notwithstanding the provisions of section 304(b)(2)), and the transferor is treated for
purposes of section 1291 and this section as the owner of any stock of the fund that it owns
directly or constructively under section 304(c). The following example illustrates the rule of this
paragraph (b)(3)(i).
Example.
USP, a domestic corporation, owns all the stock of FS1 and FS2. FS1 and
FS2 each have accumulated earnings and profits of $100 that were not previously taxed under any
other section of the Code. FS1, but not FS2, is a PFIC. USP has not elected under section 1295 to
treat FS1 as a QEF. However, USP plans to make a section 1295 election to treat FS1 as a QEF, as
well as the deemed dividend election under section 1291(d)(2)(B) to purge USP’s holding period
of the FS1 stock of its prior PFIC years. Before it makes those elections, USP plans to sell the
stock of FS1 to FS2 for its fair market value of $200. The transfer of the FS1 stock to FS2 is a
transaction to which section 304 applies. Section 304(b)(2) provides that $100 of the $200 payment
to USP is treated as paid directly by FS1 out of its earnings and profits. Pursuant to
§ 1.1291-2(b)(3)(i), the $100 distribution to USP is taxable as an excess distribution. The transfer
will not be a taxable disposition under § 1.1291-3 because USP’s interest in FS1 is not reduced as a
result of the transfer. See section 304(a)(1) and § 1.1291-6(c)(1)(i).
(ii) Limitation.—[Reserved]
(c) Excess distribution and nonexcess distribution.—
(1) Excess distribution.—An excess distribution is that portion of any direct or indirect
distribution with respect to a share of stock of a
section 1291 fund during the current shareholder year that is the ratable portion (as defined in
paragraph (c)(4) of this section) of the total excess distribution (as defined in paragraph (c)(3) of
this section), if any. Except as provided in § 1.1291-5, an excess distribution and the taxation
thereof are determined without regard to the amount or character of the earnings and profits of
the section 1291 fund. Except as provided in paragraph (d)(2) of this section (concerning shares of
stock having the same holding period), the excess distribution is calculated separately for each
share of stock held.
(2) Nonexcess distribution.—
(i) In general.—A nonexcess distribution with respect to a
share of section 1291 stock is the portion of the total amount of all distributions during the current
shareholder year with respect to the share that does not exceed 125 percent of the average
amount of the distributions with respect to the share during the three taxable years of the
shareholder’s holding period (or during the lesser number of taxable years in the shareholder’s
holding period) that immediately precede the current shareholder year. Distributions in any of the
preceding three (or fewer) taxable years of the shareholder included in the shareholder’s holding
period that began before 1987 are included in determining the nonexcess distribution.
(ii) Amount not included in income.—The portion of an excess distribution in a prior
taxable year that was not included in income pursuant to § 1.1291-2 (e)(2)(iii) is not treated as a
distribution in that prior year for purposes of paragraph (c)(2)(i) or (iii) of this section. For an
illustration of the rule of this paragraph (c)(2)(ii), see paragraph (e)(4), Example 1, of this section.
(iii) Distributions received by predecessors.—If a shareholder’s holding period of the
stock of a section 1291 fund includes the period the stock was held by another person, distributions
made during the holding period of such other person with respect to the stock will be treated
as if they had been received by the shareholder for purposes of paragraph (c)(2)(i) of this section.
(3) Total excess distribution.—
(i) In general.—The total excess distribution with respect
to a share of stock of a section 1291 fund is the excess, if any, of—
(A) The total amount of all distributions during the current shareholder year
with respect to the share, over
(B) The nonexcess distribution with respect to that stock.
(ii) Exception.—Notwithstanding paragraph (c)(3)(i) of this section, the total excess
distribution is zero for the taxable year of the shareholder in which the shareholder’s holding
period of the stock begins. The following example illustrates the rule of this paragraph (c)(3)(ii).
Example. On January 1, 1989, X, a U.S. person, gave his son Y, also a U.S. person,
one share of stock of FC, a section 1291 fund, that X had purchased in 1986. Y purchased another
share of FC stock on January 3, 1989. Y did not make the section 1295 election with respect to FC.
In 1989, FC distributed $100 for each outstanding share of its stock. Pursuant to
§ 1.1291-2(c)(3)(ii), no portion of the distribution in respect of the share Y purchased in 1989 is
treated as an excess distribution. However, the distribution paid to Y with respect to the stock
given to him by his father may be wholly or partly an excess distribution. Although Y first held
that share of FC stock in 1989, Y’s holding period includes the period X held that share of stock, as
provided in section 1223(2), and therefore does not begin in 1989.
(4) Ratable portion.—The total excess distribution is allocated ratably to each distribution
received with respect to a share of stock during the current shareholder year. A distribution’s
ratable portion of the total excess distribution is the product of the total excess distribution and
the ratio of the distribution to the total distribution with respect to the share of stock during the
current shareholder year. Each ratable portion of the total excess distribution is an excess
distribution.
(d) Special rules.—The following rules apply for purposes of calculating the nonexcess
distribution and the total excess distribution—
(1) Stock acquired during the year.—In general, a distribution in a prior taxable year with
respect to a share of stock may only be taken into account in determining a nonexcess distribution
under paragraph (c)(2)(i) of this section if the shareholder was a shareholder at the time of such
distribution, or the distribution was received by a person whose holding period of the stock is
included in the shareholder’s holding period. However, with respect to a prior taxable year during
which a person became a shareholder, the shareholder may instead take into account the total
amount (or portion thereof) that the shareholder determines was actually paid by the section 1291
fund with respect to that share of stock during that taxable year. No other annualization rule will
apply under section 1291(b)(3)(C). The following example illustrates the rule of this paragraph
(d)(1).
Example. R, a U.S. person, became an indirect shareholder of one share of FC stock on
August 1, 1991. R did not elect under section 1295 to treat FC, a PFIC, as a QEF. R and FC both
use the calendar year as their taxable years. R determines, based on dividend information
provided in FC’s 1991 annual report, that FC distributed $100 with respect to each outstanding
share of its stock at the end of each quarter during that year. For purposes of calculating
nonexcess distributions in 1992, 1993, and 1994, R may treat $400 as the amount received in 1991.
If R had been unable to determine the amount distributed in 1991 before August 1, the 1991
distribution would have been limited to the $200 actually distributed after August 1 with respect to
the one share of FC stock attributed to R.
(2) Calculations for shares with same holding period.—The calculation of the nonexcess
distribution and the total excess distribution may be made on an aggregate basis for shares of
stock having the same holding period (block of stock). The following example illustrates the rule
of this paragraph (d)(2).
Example.
(i) Facts. X, a U.S. person that is a calendar year taxpayer, owns 12 shares of
stock of FC, a PFIC. X has not elected under section 1295 to treat FC as a QEF. X acquired two of
the 12 shares on December 31, 1986 (Block #1), four shares on December 31, 1987 (Block #2),
and six shares on December 31, 1988 (Block #3). On June 30 of 1987 and 1988, FC distributed $10
in respect of each outstanding share of its stock; no portion of either distribution was an excess
distribution. On June 30, 1989, FC distributed $30 in respect of each outstanding share of its stock.
For purposes of determining the taxation of the 1989 distribution, the excess distribution may be
calculated for each of the three blocks of stock held by X instead of on a share-by-share basis.
(ii) Block #1 excess distribution. The nonexcess distribution for Block #1 is $25 (125%
times $20 [($20 + $20)/2]). The total excess distribution for Block #1 is $35 ($60 − $25).
(iii) Block #2 excess distribution. The nonexcess distribution for Block #2 is $50 (125% ×
$40, the distribution made in the only preceding taxable year in the holding period of the Block #2
shares). The total excess distribution for Block #2 is $70 ($120 − $50).
(iv) Block #3. There is no excess distribution with respect to the Block #3 stock because
the first taxable year of the holding period of that block of stock is 1989, the taxable year of the
distribution.
(3) Effect of nontaxable distribution or exchange.—
(i) Tax-free distributions of stock.—A
distribution with respect to a share of stock, made during the shareholder’s holding period for the
share but before a distribution of stock under section 305(a) with respect to that share, will be
treated ratably as a distribution with respect to the shares in the block of stock composed of the
original share and the shares distributed with respect to that share pursuant to the stock
distribution.
(ii) Nontaxable exchange of stock.—Distributions with respect to stock include distri-
butions with respect to stock exchanged therefor in a nonrecognition transfer in which gain was
not recognized pursuant to § 1.1291-6(c).
(iii) Example.—The following example illustrates the rule of paragraph (d)(3) of this
section.
Example.
On December 31, 1985, X, a U.S. person, purchased one share of stock of
FC, a corporation. FC has been a section 1291 fund with respect to X since FC’s taxable year that
began January 1, 1987. In both 1986 and 1987, FC distributed $6 with respect to each share of its
stock. FC transferred all its assets and liabilities to F, a PFIC, in a transaction that qualified as a
reorganization defined in section 368(a)(1)(C) and that was effective on January 1, 1988. X
exchanged his share of FC stock for one share of stock of F in an exchange to which section 354
applied and no gain was recognized pursuant to § 1.1291-6(c)(1). On December 31, 1988, F
distributed $3 with respect to each share of its stock. No part of the 1986, 1987, and 1988
distributions was an excess distribution. On December 31, 1989, F distributed $10 with respect to
each share of its stock. In calculating the total excess distribution for 1989, the $6 distributions
paid in 1986 and 1987 by FC with respect to the FC stock held by X, as well as the $3 distribution
paid by F in 1988 on the F stock received in exchange for the FC stock, are taken into account.
Accordingly, the total excess distribution for 1989 is $3.75 ($10 − [125% × $5 (the average
distribution for the three preceding taxable years)]).
(4) Distributions in a foreign currency.—
(i) In general.—Except as provided in paragraph
(d)(4)(ii) of this section, the nonexcess distribution and the total excess distribution are deter-
mined in U.S. dollars. Each distribution that must be taken into account for purposes of the
calculation is translated into the U.S. dollar at the spot rate (within the meaning of § 1.988-1T (d))
on the date on which such distribution was made. The following example illustrates the rule of this
paragraph (d)(4)(i).
Example.
USP, a domestic corporation, purchased on December 31, 1986, five
percent of the stock of FC, a country X corporation that is a section 1291 fund with respect to USP.
The functional currency of FC is the “LC , the currency of country X. FC made no distributions
during 1987. FC distributed $100 to USP on August 1, 1988; LC20 on November 20, 1989; and 100
units of country Y currency on December 13, 1990. In order to calculate the 1989 and 1990 excess
distributions, USP must convert the 1989 distribution of LC20 into U.S. dollars at the spot rate on
November 20, 1989, and the 1990 distribution of 100 units of country Y currency into U.S. dollars
at the spot rate on December 13, 1990.
(ii) Exception.—If all distributions that must be taken into account for purposes of
calculating the nonexcess distribution and the total excess distribution for the current shareholder
year were made in a single currency (other than the U.S. dollar), the nonexcess distribution and
total excess distribution will be determined in the currency in which the distributions were made.
Each ratable portion of a total excess distribution determined in a foreign currency is translated
into U.S. dollars at the spot rate on the date of the distribution to which the ratable portion is
allocated.
(5) Adjustments for section 642(c) charitable deduction.—
(i) In general.—A trust that is
permitted to deduct the amount of its fixed annual charitable obligation from gross income
pursuant to section 642(c)(1) (the section 642(c) deduction) generally may adjust an excess
distribution from a section 1291 fund as provided in this paragraph (d)(5) by the amount of the
section 642(c) deduction. Except as otherwise provided in this paragraph (d)(5), the trust may
adjust an excess distribution if, in satisfaction of its fixed annual obligation, it distributes—
(A) amounts received from the section 1291 fund;
(B) the stock of a section 1291 fund; or
(C) the proceeds from the sale thereof, to an organization described in section
170(c), as required under the terms of the governing instrument of the trust.
The adjustment provided in this paragraph (d)(5) is limited to the amount of the trust’s fixed
annual charitable obligation.
(ii) Exception.—This paragraph (d)(5) does not apply to a grantor of a trust if the
grantor deducted from income, as provided in section 170(f)(2)(B), the value of an interest in any
share of stock of the section 1291 fund upon its transfer to the trust.
(iii) Adjustments.—
(A) Corpus consisting only of section 1291 fund stock.—Where the
assets of the trust consist only of stock of one or more section 1291 funds, the section 642(c)
deduction first reduces the nonexcess distributions, if any, determined under paragraph (c)(2)(i)
of this section. The amount of the section 642(c) deduction remaining after reduction of the
nonexcess distributions reduces the portions of the excess distributions allocated to the prePFIC
and current shareholder years. Finally, the amount of the section 642(c) deduction remaining after
the prior two reductions reduces pro rata the portions of the excess distributions allocated to the
prior PFIC years. The deferred tax amount, as defined in § 1.1291-4, is determined with respect to
the adjusted allocations of the excess distributions.
(B) Corpus consisting of section 1291 fund stock and other property.—
(1) Income
from both section 1291 fund stock and other property.—A distribution of income in satisfaction of a
fixed annual charitable obligation is treated as distributed out of income, if any, derived from the
trust property other than the stock of a section 1291 fund to the extent thereof, before being
treated as distributed out of amounts received from a section 1291 fund. An adjustment will be
permitted in the manner provided in paragraph (d)(5)(iii)(A) of this section only after the
deduction permitted under section 642(c) has reduced income from other property to zero.
(2) Use of corpus to satisfy obligation.—The trust will not be entitled to the
adjustment permitted under this paragraph (d)(5) if the trust uses stock of a section 1291 fund
instead of its other property to satisfy its fixed annual charitable obligation.
(6) PFIC for part of current shareholder year.—This paragraph (d)(6) applies if the
section 1291 fund first qualified as a PFIC for its taxable year beginning after the first day of the
current shareholder year and therefore is a section 1291 fund for only a portion of the current
shareholder year. Distributions during the portion of the current shareholder year before the
corporation qualified as a PFIC are taken into account for purposes of calculating the nonexcess
distribution and the total excess distribution. However, those distributions are taxable under the
general rules applicable to distributions by a corporation to its shareholder with respect to its
stock, notwithstanding that a ratable portion thereof may be an excess distribution within the
meaning of paragraph (c)(1) of this section. The following example illustrates the rule of this
paragraph (d)(6).
Example.
X, a U.S. person, purchased one share of stock of FC, a corporation, on
December 31, 1986. X uses the calendar year as its taxable year; FC’s taxable year ends November
30. FC first qualified as a PFIC for its taxable year that began December 1, 1990. X did not elect
under section 1295 to treat FC as a QEF. X received a distribution of $100 in 1987, but did not
receive another distribution from FC until August 1, 1990, when FC distributed $100 per share. On
December 13, 1990, FC made another $100 per share distribution. The August distribution is
taken into account for purposes of calculating the nonexcess distribution and total excess
distribution for 1990 and the ratable portion of the December 13 distribution that is an excess
distribution. However, pursuant to § 1.1291-2(d)(6), the August distribution is not subject to
section 1291 notwithstanding that a ratable portion of that distribution is an excess distribution
within the meaning of § 1.1291-2(c)(1). The August distribution is included in X’s 1990 gross
income to the extent provided in section 301(c).
(e) Taxation of a distribution and effect on earnings and profits.—
(1) Nonexcess distribution.—
A nonexcess distribution, as defined in paragraph (c)(2)(i) of this section, is taxable to a
shareholder according to the general rules of taxation applicable to distributions made by a
corporation to a shareholder with respect to its stock. See, e.g., section 301 and the regulations
under that section.
(2) Excess distribution.—
(i) In general.—To determine the taxation of an excess distribution,
the excess distribution is first allocated pro rata to each day in the shareholder’s holding
period (as determined under § 1.1291-1(h)) of the share of stock with respect to which the
distribution was made. The holding period of a share of stock of a section 1291 fund is treated as
ending on (and including) the date of each excess distribution solely for purposes of allocating the
excess distribution.
(ii) Allocations included in income.—The portions of an excess distribution allocated
to prePFIC years and the current shareholder year are included in the shareholder’s gross income
for the current shareholder year as ordinary income.
(iii) Allocations not included in income.—The portions of an excess distribution
allocated to prior PFIC years are not included in the shareholder’s gross income for purposes of
this title. These amounts are subject to the deferred tax amount. The deferred tax amount is an
additional liability of the shareholder for tax and interest for the current shareholder year. For the
calculation of the deferred tax amount and the foreign tax credit that may be taken to reduce the
deferred tax amount, see § § 1.1291-4 and 1.1291-5.
(3) Allocation of earnings and profits.—For purposes of determining the taxation of a
nonexcess distribution and calculating the foreign tax credit under § 1.1291-5, the earnings and
profits of a section 1291 fund are allocated proportionately between the nonexcess distribution (as
defined in paragraph (c)(2)(i) of this section) and the total excess distribution (as defined in
paragraph (c)(3) of this section) and reduced (but not below zero) by the amounts thereof.
(4) Examples.—The following examples illustrate the operation of paragraphs (c), (d),
and (e) of this section.
Example 1.
(i) Facts. X, a U.S. person, purchased a share of stock of FC, a corporation,
on December 31, 1985. FC has been a section 1291 fund since its taxable year that began January
1, 1987. X received distributions from FC of $50 on December 31, 1987, $80 on December 31,
1988, and $150 on December 31, 1989. FC made no distributions in 1986.
(ii) 1987 excess distribution. Because X did not receive a distribution from FC during
1986, the only preceding taxable year in its holding period, the total distribution of $50 is the total
excess distribution for 1987. That amount is allocated pro rata over X’s two-year holding period, as
provided in § 1.1291-2(e)(2)(i): $25 is allocated to 1986, a prePFIC year, and $25 to 1987, the
current shareholder year. The entire $50 therefore is included in X’s gross income for 1987 as
ordinary income.
(iii) 1988 excess distribution. In 1988, of the $80 total distribution, $31.25 (125% × $25 [(0 +
$50) / 2]) is the nonexcess distribution, and is taxable as a corporate distribution as provided in
section 301(c). The total excess distribution for 1988, $48.75 ($80 − $31.25), is allocated over X’s
three-year holding period; $16.25 is allocated to each year. The portions of the excess distribution
allocated to the prePFIC year (1986) and the current shareholder year (1988) total $32.50; that
amount is included in X’s gross income as ordinary income. The $16.25 portion of the excess
distribution allocated to 1987, the prior PFIC year, is not included in X’s gross income, but is
subject to the deferred tax amount. Of the $80 distribution, $63.75 ($31.25 + $32.50) is included in
X’s gross income in 1988.
(iv) 1989 excess distribution. In 1989, of the $150 total distribution, $47.40 (125% × $37.90
[(0 + $50 + $63.75) / 3]) is the nonexcess distribution, and is taxable as a corporate distribution as
provided in section 301(c). The total excess distribution for 1989, $102.60 ($150 −$47.40), is
allocated over X’s four-year holding period; $25.65 is allocated to each year. The portions of the
excess distribution allocated to the prePFIC year (1986) and the current shareholder year (1989)
total $51.30; that amount is included in X’s gross income as ordinary income. The portions of the
excess distribution allocated to the prior PFIC years (1987 and 1988) total $51.30; that amount is
not included in X’s gross income but is subject to the deferred tax amount. Of the total $150
distribution, $98.70 ($47.40 + $51.30) is included in X’s gross income in 1989.
Example 2.
(i) Facts. X, a U.S. person with a calendar taxable year, purchased 1,000
shares of stock of FC, a corporation, on December 31, 1985. FC has been a section 1291 fund since
its taxable year that began January 1, 1987. FC distributed $100,000 to X on January 31, 1989, and
$200,000 to X on July 31, 1989. X determined the total excess distribution for 1989 to be $150,000.
(ii) January 31 distribution. The excess distribution allocated to the January 31 distribution,
which is the ratable portion of the total excess distribution allocated to the $100,000
distribution made on that date, is $50,000 [$150,000 × ($100,000 / $300,000)]. For purposes of
allocating the $50,000 excess distribution over X’s holding period, X’s holding period is treated as
ending on (and including) January 31, 1989. X thus held the stock for 1,127 days (365 days in both
1986 and 1987, 366 days in 1988, and 31 days in 1989) at the time of the January 31 distribution.
The $50,000 excess distribution allocated to the January 31 distribution is allocated pro rata to the
1,127 days; approximately $44.37 is allocated to each day in the holding period. The total
allocations to each of the taxable years in X’s holding period are as follows:
| TAXABLE YEAR | TOTAL ALLOCATION PER YEAR |
| 1986 | $16,193.70 |
| 1987 | $16,193.70 |
| 1988 | $16,237.70 |
| 1989 | $ 1,374.90 |
| Excess distribution: | $50,000.00 |
The allocation to 1986, the prePFIC year, and the allocation to 1989, the current shareholder year,
are included in X’s gross income for 1989 as ordinary income. The allocations to 1987 and 1988,
the prior PFIC years, are not included in X’s gross income in 1989, but are subject to the deferred
tax amount.
(iii) July 31 distribution. The excess distribution allocated to the July 31 distribution,
which is the ratable portion of the total excess distribution allocated to the distribution made on
that date, is $100,000 [$150,000 × ($200,000 / $300,000)]. For purposes of the allocation of this
excess distribution, X’s holding period is treated as ending on July 31, 1989. X thus held the stock
for 1,308 days (365 days in both 1986 and 1987, 366 days in 1988, and 212 days in 1989) at the time
of the July 31 distribution. The $100,000 excess distribution allocated to the July 31 excess
distribution is allocated pro rata to the 1,308 days; approximately $76.45 is allocated to each day in
the holding period. The total allocations of the July 31 excess distribution to each of the taxable
years in X’s holding period are as follows:
| TAXABLE YEAR | TOTAL ALLOCATION PER YEAR |
| 1986 | $ 27,905.20 |
| 1987 | $ 27,905.20 |
| 1988 | $ 27,981.65 |
| 1989 | $ 16,207.95 |
| Excess distribution: | $100,000.00 |
The portions of the excess distribution allocated to 1986, the prePFIC year, and to 1989, the
current shareholder year, are included as ordinary income in X’s gross income for 1989. The
portions of the excess distribution allocated to 1987 and 1988, the prior PFIC years, are not
included in X’s gross income in 1989, but are subject to the deferred tax amount.
Example 3.
(i) Facts. X, a U.S. person, holds six shares of the stock of FC, a section 1291
fund. Two shares were purchased on December 31, 1986 (Block #1), and four shares were
purchased on December 31, 1987 (Block #2). On June 30 of 1987 and 1988, FC distributed $10,000
in respect of each outstanding share of its stock. No portion of the distributions in either year was
an excess distribution. On June 30, 1989, FC distributed $30,000 in respect of each outstanding
share of its stock.
(ii) Calculation of the 1989 excess distributions. The excess distribution is determined
separately for each block of stock.
(A) Block #1 excess distribution. The nonexcess distribution for Block #1 is $25,000 [125%
times ($20,000 + $20,000) / 2]. The total excess distribution for Block #1 is $35,000 ($60,000 −
$25,000).
(B) Block #2 excess distribution. The nonexcess distribution for Block #2 is $50,000 [125%
times $40,000 (the distribution received in the only preceding taxable year included in X’s holding
period]. The total excess distribution for Block #2 is $70,000 ($120,000 − $50,000).
(iii) Block #1 allocation. The holding period of the Block #1 stock began on January 1,
1987, and ended, for purposes of section 1291, on June 30, 1989, for a total of 912 days (365 days in
1987, 366 days in 1988 and 181 days in 1989). The $35,000 excess distribution for Block #1 is
allocated pro rata to each of the 912 days. Accordingly, approximately $38.38 is allocated to each
day. The total allocations to each of the taxable years in X’s holding period are as follows:
| TAXABLE YEAR | TOTAL ALLOCATION PER YEAR |
| 1987 | $14,007.70 |
| 1988 | $14,046.10 |
| 1989 | $ 6,946.20 |
| Excess distribution: | $35,000.00 |
The portion of the excess distribution allocated to 1989, the current shareholder year, of $6,946.20,
is included as ordinary income in X’s gross income for 1989. The portions of the excess
distribution allocated to the prior PFIC years, 1987 and 1988, an aggregate of $28,053.80, are not
included in X’s gross income in 1989, but are subject to the deferred tax amount.
(iv) Block #2 allocation. The holding period of the Block #2 stock began on January 1,
1988, and ended, for purposes of section 1291, on June 30, 1989, for a total of 547 days (366 days in
1988 and 181 days in 1989). The excess distribution of $70,000 in respect of the Block #2 stock is
allocated pro rata to each of the 547 days. Accordingly, approximately $127.97 is allocated to each
day. The total allocations to each of the taxable years in X’s holding period are as follows:
| TAXABLE YEAR | TOTAL ALLOCATION PER YEAR |
| 1988 | $46,837.40 |
| 1989 | $23,162.60 |
| Excess distribution: | $70,000.00 |
The portion of the excess distribution allocated to 1989, the current shareholder year, of
$23,162.60, is included as ordinary income in X’s gross income for 1989. The portion of the excess
distribution allocated to 1988, $46,837.40, is not included in X’s gross income in 1989, but is
subject to the deferred tax amount.
Example 4.
X is a U.S. person that owns all the stock of FC, a section 1291 fund. At the
end of its 1991 taxable year, FC has accumulated earnings and profits, before reduction for
distributions made during the year, of $100, none of which was previously taxed to X under section
951 or 1293. FC distributes $200 to X on the last day of FC’s taxable year. X determines that, of the
$200 distribution, $50 is a nonexcess distribution, and $150 is the total excess distribution. FC’s
earnings and profits of $100 are allocated proportionately between the nonexcess distribution of
$50 and the excess distribution of $150, and reduced to zero. Accordingly, $25 of FC’s earnings
and profits are allocated to the nonexcess distribution and $75 of FC’s earnings and profits are
allocated to the excess distribution. Therefore, $25 of the $50 nonexcess distribution is taxable as
a dividend under section 301(c)(1), and the remaining $25 is taxable to the extent provided in
section 301(c)(2) and (3). The excess distribution of $150 is taxable as provided in
§ 1.1291-2(e)(2).
(f) Indirect distributions.—
(1) In general.—A distribution (as defined in § 1.1291-2(b)) by a
section 1291 fund to the actual owner of stock of the section 1291 fund is an indirect distribution if
such stock is considered owned by a U.S. person pursuant to § 1.1291-1(b)(8). Except as otherwise
provided in this paragraph (f), an indirect shareholder is taxable on the total distribution paid by
the section 1291 fund with respect to the stock attributed to the indirect shareholder, as if the
indirect shareholder had actually received that amount. The following example illustrates the rule
of this paragraph (f)(1).
Example.
(i) X, an S corporation under section 1361, purchased 100 shares of stock of
FC, a corporation, on December 31, 1985. FC has been a section 1291 fund since its taxable year
that began January 1, 1987. A purchased 10 percent of the stock of X on December 31, 1986, and
thus became an indirect shareholder of 10 shares of FC stock. Pursuant to § 1.1291-1(h)(4)(i), A’s
holding period of the FC stock began on January 1, 1987.
(ii) FC distributed $5 per share of stock to its shareholders in 1986, and $8 per share in
1987. In 1987 A is treated as receiving a distribution of $80 from FC. A did not have a total excess
distribution in 1987, the taxable year in which A’s holding period of the FC stock began.
(iii) FC distributed $12 per share in 1988, all of which was paid on June 30, 1988. A
therefore is treated as receiving a distribution of $120 from FC. The nonexcess distribution is $100
[125% times $80]. Accordingly, the excess distribution is $20 ($120 − $100). That amount is
allocated under § 1.1291-2(e)(2)(i) to each day in A’s holding period of the FC stock, which began
on January 1, 1987, and ended, for purposes of the allocation of the excess distribution, on June 30,
1988.
(2) Pass-through entities.—
(i) Taxation of trusts, estates, and their beneficiaries.—[Reserved]
(ii) Information reporting.—
(A) In general.—A domestic partnership that is a direct
or indirect shareholder of a section 1291 fund must separately state the total distribution as a
distribution from a section 1291 fund on its federal income tax return (if any) and on any Schedule
K-1 filed by the partnership or provided to a partner to which a distributive share of the
distribution from the section 1291 fund is allocated pursuant to section 704. In addition, the
partnership must state on the Schedule K-1 the information needed by the partner to compute its
excess distribution with respect to such total distribution, and provide the name, address and
stock basis, where appropriate, of the actual owner of the section 1291 fund that paid the
distribution (or whose stock was transferred in an indirect disposition). Any partner receiving
such a Schedule K-1 that is itself a domestic partnership is in turn obligated to separately state
such information according to the same rules. Similar rules apply to S corporations.
(B) Trusts and estates.—[Reserved]
(3) Coordination with subpart F.—If, but for this paragraph (f)(3), an indirect distribution
would be taxable to an indirect shareholder under this section and also included in the gross
income of the indirect shareholder under section 551(a), 951(a)(1), or 1293(a), the indirect
distribution is taxable only under this section.
(4) Exceptions.—(i) Distribution to sole shareholder.—A distribution by a section 1291
fund (distributing fund) to another section 1291 fund (distributee fund) will not be taxable to the
direct shareholder of the distributee fund if—
(A) The distributee fund owns all the stock of the distributing fund; and
(B) The distributing fund distributed all its earnings and profits in the current
shareholder year and annually distributed all its earnings and profits for each year that is included
in the shareholder’s holding period of the distributing fund.
(ii) Other exceptions.—[Reserved]
(5) Adjustment to basis.—The shareholder’s adjusted basis of the stock or other property
that is owned directly by the shareholder and through which ownership of the section 1291 fund is
attributed to the shareholder is increased by the amount of the indirect distribution taxed to the
shareholder pursuant to paragraph (f)(1) of this section.
(6) Treatment of previously taxed amounts.—The principles of sections 959 and 961 apply
with respect to amounts previously taxed under this paragraph (f). The following example
illustrates the rule of this paragraph (f)(6).
Example.
USP owns 50% of CFC1. CFC1 and its wholly owned subsidiary, CFC2, are
both controlled foreign corporations within the meaning of section 957(a), but are not PFICs.
CFC2 owns 10% of the stock of NQF, a PFIC. USP is an indirect shareholder of NQF pursuant to
§ 1.1291-1(b)(8)(ii). USP has not elected to treated NQF as a QEF. In 1992, NQF distributes $100
to CFC2, and CFC1 distributes $100 to USP, but CFC2 makes no distributions to CFC1. At the end
of 1992, CFC1 has accumulated earnings and profits of $200, none of which was previously taxed
to USP under section 951(a)(1). USP is taxable pursuant to § 1.1291-2(f) on its pro rata share of the
indirect distribution paid to CFC2, and also is taxable on CFC1’s distribution pursuant to section
301(c). No part of the distribution by CFC1 to USP is attributable to the amount taxed to USP
under § 1.1291-2(f) because no part of the distribution can be attributed to NQF’s distribution to
CFC2. [Prop. Reg. § 1.1291-2.]
[Proposed 4-1-92.]