(a) In general.—This section provides certain
rules under section 1295 applicable to a U.S. person that has elected to treat a PFIC (as defined in
§ 1.1291-1(b)(1)) as a QEF (as defined in § 1.1291-1(b)(2)(i)). A U.S. person that has elected to
treat a PFIC as a QEF is taxable annually, pursuant to section 1293, on its pro rata share of the
ordinary earnings and net capital gain of the QEF.
(b) Application of section 1295 election.—
(1) Election personal to shareholder.—An election
under section 1295 and this section (section 1295 election) applies only to the shareholder that
makes the election. Accordingly, a shareholder’s section 1295 election will not apply to a U.S.
transferee (as defined in § 1.1291-6(c)(2)(i)) of stock of a PFIC with respect to which the
shareholder made a section 1295 election. A section 1295 election made by a common parent of a
consolidated group as agent for members of the group is considered made by each member of the
group that owns stock of the PFIC at the time of the election and at any time thereafter.
(2) Election applicable to specific corporation only.—
(i) In general.—Only a corporation
with respect to which a shareholder makes a section 1295 election is a QEF. The shareholder’s
section 1295 election applies to all the stock of the QEF that the shareholder owns at the time of
the election or acquires thereafter. Except as provided in paragraph (b)(2)(ii) of this section, if a
shareholder transfers stock of a QEF in exchange for stock of another PFIC, the latter PFIC is not
a QEF unless the shareholder makes a section 1295 election to treat it as a QEF. If a shareholder
disposes of stock of a QEF in exchange for stock of another PFIC in a nonrecognition transfer (as
defined in § 1.1291-6(a)(2)) effected prior to April 1, 1992, and the shareholder has consistently
treated the other PFIC as a QEF, the shareholder may make a section 1295 election with respect
to the other PFIC whose stock was received for the taxable year of the PFIC that includes the day
the transfer was effected. Such election must be made by the later of—
(A) The due date provided in section 1295(b); or
(B) The due date for the return for the taxable year of the shareholder that
includes April 1, 1992.
For the deadline for making the section 1295 election in the case of nonrecognition transfers
effected after April 1, 1992, see section 1295(b).
(ii) Stock of QEF received in a nonrecognition transfer.—If a U.S. person is a U.S.
transferee (as defined in § 1.1291-6(c)(2)(i)) of stock of a PFIC in a nonrecognition transfer in
which the shareholder disposing of such stock does not fully recognize the gain with respect to
such stock, and the U.S. transferee, at the time of the transaction, has in effect a section 1295
election with respect to that PFIC, the section 1295 election will apply to the newly acquired stock
on the day after the transaction. The newly acquired stock will be treated as stock of an
unpedigreed QEF for which an election under section 1291(d)(2) and § 1.1291-9 or 1.1291-10 may
be made. For purposes of making a section 1291(d)(2) election pursuant to this paragraph
(b)(2)(ii), the qualification date is the day after the nonrecognition transaction. The following
example illustrates the rule of this paragraph (b)(2)(ii).
(i) X, a domestic corporation, owns stock of NQF, a section 1291 fund with
respect to X, and stock of FC, a pedigreed QEF with respect to X. Pursuant to a plan of
reorganization, X and the other shareholders of NQF exchange their NQF stock for voting stock
of FC in a transaction that qualifies as a reorganization described in section 368(a)(1)(C).
Pursuant to § 1.1291-6(c)(1), the gain recognition rule of § 1.1291-6(b)(1) does not apply to X’s
disposition of NQF stock. X therefore does not recognize gain on the exchange of NQF stock for
FC stock. X’s adjusted basis in the FC stock received in the reorganization is equal to X’s adjusted
basis in the NQF stock immediately prior to the transfer. The holding period of the FC stock
received includes the period during which X held the NQF stock, and, as provided in
§ 1.1291-1(h)(7), the character of the days during that period as prePFIC and prior PFIC carry
over to the FC stock.
(ii) As provided in § 1.1295-1(b)(2)(ii), the section 1295 election that X made with
respect to FC applies to the FC stock received in the reorganization. However, because the
holding period of the FC stock received in exchange for the NQF stock includes days that are
treated as prior PFIC days, the FC stock received in the reorganization is treated as stock of an
unpedigreed QEF. X may make an election under section 1291(d)(2) to purge the holding period
of the FC stock received of the prior PFIC days carried over with the NQF holding period.
[Prop. Reg. § 1.1295-1.]