(a) In general.—The deferred tax amount is the
sum of the aggregate increases in taxes (defined in paragraph (c)(5) of this section) and the
aggregate amount of interest (defined in paragraph (d) of this section) determined with respect to
the aggregate increases in taxes. The deferred tax amount is computed for the portions of each
excess distribution allocated to different prior PFIC years, as defined in § 1.1291-1(b)(4).
(b) Character of deferred tax amount.—The aggregate increases in taxes are an additional
amount of tax imposed on the shareholder for the current shareholder year. The aggregate
increases in taxes are treated as an income tax for purposes of subtitle F (Procedure and
Administration), and therefore will be assessed, collected, paid, and subject to penalties and
interest in the same manner as other taxes on income. The aggregate amount of interest is treated
as interest under section 6601. To determine the extent to which such interest may be deducted
for federal income tax purposes, see section 163 and the regulations under that section.
(c) Increase in tax.—
(1) In general.—An increase in tax is determined for each portion of an
excess distribution allocated to a prior PFIC year. Each increase in tax is determined by
multiplying the amount of the excess distribution allocated to the prior PFIC year by the highest
statutory rate of tax in effect under either section 1 or section 11, as applicable, for that prior PFIC
year.
(2) Rate of tax in effect.—The highest statutory rate of tax is determined without regard
to the actual rate of tax to which the shareholder was subject in that prior PFIC year. The rate of
tax in effect in the case of a distribution or disposition taxable to an indirect shareholder is the rate
in effect for the indirect shareholder. For taxable years of the shareholder beginning after 1987
and before January 1, 1991, the highest statutory rate of tax in effect under section 1 is 28 percent.
If there was a change of tax rates during a taxable year, the highest rate of tax is determined in the
manner described in section 15(e) using the highest statutory rates of tax in effect before and after
the change of rates.
(3) Reduction for foreign taxes.—To the extent provided in section 1291(g) and § 1.1291-5,
each increase in tax is reduced by the foreign tax credit calculated with respect to the increase in
tax.
(4) Net increase in tax.—The net increase in tax is the amount of the increase in tax after
reduction for creditable foreign taxes. See paragraph (d) of this section.
(5) Aggregate increases in taxes.—The term aggregate increases in taxes means the sum
of all net increases in tax calculated for an excess distribution.
(d) Aggregate amount of interest.—
(1) In general.—The aggregate amount of interest is the
sum of the interest charges computed on all net increases in tax calculated for an excess
distribution. An interest charge is computed separately for the interest period of each net increase
in tax by using the applicable rates and method under section 6621. The interest period for a net
increase in tax is the period beginning on the due date of the income tax return for the prior PFIC
year for which the net increase in tax was computed and ending on the due date for the income
tax return for the current shareholder year. For purposes of this paragraph, the term due date
means the date prescribed by law, determined without regard to extensions, for filing the income
tax return for the taxable year of the shareholder.
(2) Reduction for interest paid under section 453A(c).—A disposition may be subject to
both sections 1291 and 453A(c). The aggregate amount of interest determined in paragraph (d)(1)
of this section is reduced by the amount of interest paid under section 453A(c) that is attributable
to an excess distribution arising from the disposition. The shareholder may use any reasonable
method of determining the amount of the reduction.
(e) Examples.—The following examples illustrate the rules of this section.
Example 1.
(i) Facts. X is a domestic corporation that is a calendar year taxpayer. The due
date (without regard to extensions) for its federal income tax return is March 15. X acquired a
share of stock of FC, a corporation, on December 31, 1986, for $500. FC has been a section 1291
fund with respect to X since FC’s taxable year that began January 1, 1987. On December 31, 1990,
X sold the FC stock for $1000. X did not incur any foreign tax on the disposition of the FC stock.
X’s gain on the sale, $500, is taxed as an excess distribution. The excess distribution is allocated
pro rata over X’s four-year holding period. Accordingly, $125 is allocated to each year in X’s
holding period. The $125 allocated to 1990, the current shareholder year, is included in X’s
ordinary income for that year. The allocations to 1987, 1988 and 1989, the prior PFIC years, are
subject to the deferred tax amount under § 1.1291-4.
(ii) Calculation of the 1987 increase in tax. The increase in tax for the $125 allocated to 1987 is
determined in the manner described in section 15(e) by using a weighted average rate. The
weighted average rate is 40 percent:
| 46% rate: 181/365 × 46% | = | 22.81% |
| 34% rate: 184/365 × 34% | = | 17.14% |
| = | 39.95% |
The increase in tax for 1987 is $49.94 ($125 × 39.95%).
(iii) Calculation of the other increases in tax. The highest statutory rate of tax applicable to X
that was in effect for both 1988 and 1989 was 34 percent. The increase in tax for each of 1988 and
1989 is $42.50 ($125 × 34%).
(iv) Aggregate increases in taxes. The aggregate increases in taxes are $134.94 ($49.94 + $42.50
+ $42.50).
(v) Interest charge. Interest on each of the three increases in tax ($49.94, $42.50, and $42.50)
is computed using the rates and method provided in section 6621 for the respective interest
period. The following are the interest periods:
| Year of Allocation | Increase in Tax | Interest Period | |
| Beginning on | Ending on | ||
| 1987 | $49.94 | March 15, 1988 | March 15, 1991 |
| 1988 | 42.50 | March 15, 1989 | March 15, 1991 |
| 1989 | 42.50 | March 15, 1990 | March 15, 1991 |
Example 2.
(i) Facts. The facts are the same as in Example 1 except that X was a C
corporation until it elected to be treated as an S corporation effective for its taxable year beginning
January 1, 1988. A is a U.S. person who has been a shareholder of X since January 1, 1988. A’s
holding period of the FC stock began on January 1, 1988, pursuant to § 1.1291-1(h)(4)(i). As of
January 1, 1988, the FC stock had appreciated in value to $800; X therefore had $300 of built-in
gain within the meaning of section 1374. Assume X pays a built-in gain tax of $102 because of the
sale of the FC stock in 1990.
(ii) Calculation of the aggregate increases in taxes owed by A. The $500 gain recognized,
reduced as provided in section 1366(f)(2) by the amount of built-in gain tax of $102 paid by X
pursuant to section 1374 to $398, is taxable to A as an excess distribution as provided in
§ 1.1291-2(e)(2). The $398 excess distribution is allocated pro rata over X’s four-year holding
period (not A’s three-year holding period) as provided in § 1.1291-3(e)(5). The allocation of $99.50
to 1990, the current shareholder year, is included in A’s ordinary income. The allocations of $99.50
to 1987, 1988, and 1989 are not included in income, but are subject to the deferred tax amount.
The aggregate increases in taxes are determined based on those $99.50 allocations.
(A) Calculation of the 1987 increase in tax. The highest statutory rate of tax applicable to A
that was in effect in 1987 was 38.5 percent. The increase in tax for the portion of the excess
distribution allocated to 1987 is $38.31 ($99.50 × 38.5%).
(B) Calculation of the other increases in tax. The highest statutory rate of tax applicable to A
that was in effect for both 1988 and 1989 is 28 percent. The increase in tax for each of 1988 and
1989 is $27.86 ($99.50 × 28%).
(C) Calculation of the aggregate increases in taxes. The aggregate increases in taxes are $94.03
($38.31 + 27.86 + 27.86).
(iii) Calculation of the aggregate amount of interest. For purposes of calculating the aggregate
amount of interest, the reduction provided under section 1366(f)(2) is disregarded and the excess
distribution is $500. Accordingly, for purposes of calculating the aggregate amount of interest,
$125 is allocated to 1987, 1988, and 1989.
(A) Calculation of the 1987 hypothetical increase in tax. The highest statutory rate of tax
applicable to A that was in effect in 1987 was 38.5 percent. The hypothetical increase in tax for the
portion of the excess distribution allocated to 1987 is $48.12 ($125 × 38.5%).
(B) Calculation of the other hypothetical increases in tax. The highest statutory rate of tax
applicable to A that was in effect for both 1988 and 1989 is 28 percent. The hypothetical increase in
tax for each of 1988 and 1989 is $35.00 ($125 × 28%).
(C) Interest charge. Interest on each of the three hypothetical increases in tax ($48.12, $35,
and $35) is computed using the rates and method provided in section 6621 for the respective
interest period. The following are the interest periods:
| Year of Allocation | Increase in Tax | Interest Period | |
| Beginning on | Ending on | ||
| 1987 | $48.12 | April 15, 1988 | April 15, 1991 |
| 1988 | 35.00 | April 15, 1989 | April 15, 1991 |
| 1989 | 35.00 | April 15, 1990 | April 15, 1991 |
(iv) The deferred tax amount. The deferred tax amount is the sum of the aggregate increases
in taxes determined in (ii) and the aggregate amount of interest determined in (iii). [Prop. Reg.
§ 1.1291-4.]
[Proposed 4-1-92.]