26 U.S.C. § 1298 — Special rules

Page 2420 TITLE 26—INTERNAL REVENUE CODE § 1298 corporations end, see section 13231(e) of Pub. L. 103–66, set out as a note under section 951 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE Section applicable to taxable years of foreign cor- porations beginning after Dec. 31, 1986, see section 1235(h) of Pub. L. 99–514, set out as a note under section 1291 of this title. § 1298. Special rules (a) Attribution of ownership For purposes of this part— (1) Attribution to United States persons This subsection— (A) shall apply to the extent that the ef- fect is to treat stock of a passive foreign in- vestment company as owned by a United States person, and (B) except to the extent provided in regu- lations, shall not apply to treat stock owned (or treated as owned under this subsection) by a United States person as owned by any other person. (2) Corporations (A) In general If 50 percent or more in value of the stock of a corporation is owned, directly or indi- rectly, by or for any person, such person shall be considered as owning the stock owned directly or indirectly by or for such corporation in that proportion which the value of the stock which such person so owns bears to the value of all stock in the cor- poration. (B) 50-percent limitation not to apply to PFIC For purposes of determining whether a shareholder of a passive foreign investment company is treated as owning stock owned directly or indirectly by or for such com- pany, subparagraph (A) shall be applied without regard to the 50-percent limitation contained therein. Section 1297(d) shall not apply in determining whether a corporation is a passive foreign investment company for purposes of this subparagraph. (3) Partnerships, etc. Stock owned, directly or indirectly, by or for a partnership, estate, or trust shall be con- sidered as being owned proportionately by its partners or beneficiaries. (4) Options To the extent provided in regulations, if any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an op- tion to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (5) Successive application Stock considered to be owned by a person by reason of the application of paragraph (2), (3), or (4) shall, for purposes of applying such para- graphs, be considered as actually owned by such person. (b) Other special rules For purposes of this part— (1) Time for determination Stock held by a taxpayer shall be treated as stock in a passive foreign investment company if, at any time during the holding period of the taxpayer with respect to such stock, such cor- poration (or any predecessor) was a passive foreign investment company which was not a qualified electing fund. The preceding sen- tence shall not apply if the taxpayer elects to recognize gain (as of the last day of the last taxable year for which the company was a pas- sive foreign investment company (determined without regard to the preceding sentence)) under rules similar to the rules of section 1291(d)(2). (2) Certain corporations not treated as PFIC’s during start-up year A corporation shall not be treated as a pas- sive foreign investment company for the first taxable year such corporation has gross in- come (hereinafter in this paragraph referred to as the ‘‘start-up year’’) if— (A) no predecessor of such corporation was a passive foreign investment company, (B) it is established to the satisfaction of the Secretary that such corporation will not be a passive foreign investment company for either of the 1st 2 taxable years following the start-up year, and (C) such corporation is not a passive for- eign investment company for either of the 1st 2 taxable years following the start-up year. (3) Certain corporations changing businesses A corporation shall not be treated as a pas- sive foreign investment company for any tax- able year if— (A) neither such corporation (nor any pred- ecessor) was a passive foreign investment company for any prior taxable year, (B) it is established to the satisfaction of the Secretary that— (i) substantially all of the passive in- come of the corporation for the taxable year is attributable to proceeds from the disposition of 1 or more active trades or businesses, and (ii) such corporation will not be a pas- sive foreign investment company for ei- ther of the 1st 2 taxable years following such taxable year, and (C) such corporation is not a passive for- eign investment company for either of such 2 taxable years. (4) Separate interests treated as separate cor- porations Under regulations prescribed by the Sec- retary, where necessary to carry out the pur- poses of this part, separate classes of stock (or other interests) in a corporation shall be treated as interests in separate corporations. Page 2421 TITLE 26—INTERNAL REVENUE CODE § 1298 (5) Application of part where stock held by other entity (A) In general Under regulations, in any case in which a United States person is treated as owning stock in a passive foreign investment com- pany by reason of subsection (a)— (i) any disposition by the United States person or the person owning such stock which results in the United States person being treated as no longer owning such stock, or (ii) any distribution of property in re- spect of such stock to the person holding such stock, shall be treated as a disposition by, or dis- tribution to, the United States person with respect to the stock in the passive foreign investment company. (B) Amount treated in same manner as pre- viously taxed income Rules similar to the rules of section 959(b) shall apply to any amount described in sub- paragraph (A) and to any amount included in gross income under section 1293(a) (or which would have been so included but for section 951(c)) in respect of stock which the tax- payer is treated as owning under subsection (a). (6) Dispositions Except as provided in regulations, if a tax- payer uses any stock in a passive foreign in- vestment company as security for a loan, the taxpayer shall be treated as having disposed of such stock. (7) Treatment of certain foreign corporations owning stock in 25-percent owned domes- tic corporation (A) In general If— (i) a foreign corporation is subject to the tax imposed by section 531 (or waives any benefit under any treaty which would oth- erwise prevent the imposition of such tax), and (ii) such foreign corporation owns at least 25 percent (by value) of the stock of a domestic corporation, for purposes of determining whether such foreign corporation is a passive foreign in- vestment company, any qualified stock held by such domestic corporation shall be treat- ed as an asset which does not produce pas- sive income (and is not held for the produc- tion of passive income) and any amount in- cluded in gross income with respect to such stock shall not be treated as passive income. (B) Qualified stock For purposes of subparagraph (A), the term ‘‘qualified stock’’ means any stock in a C corporation which is a domestic corporation and which is not a regulated investment company or real estate investment trust. (8) Treatment of certain subpart F inclusions Any amount included in gross income under section 951(a)(1)(B) shall be treated as a dis- tribution received with respect to the stock. (c) Treatment of stock held by pooled income fund If stock in a passive foreign investment com- pany is owned (or treated as owned under sub- section (a)) by a pooled income fund (as defined in section 642(c)(5)) and no portion of any gain from a disposition of such stock may be allo- cated to income under the terms of the gov- erning instrument of such fund— (1) section 1291 shall not apply to any gain on a disposition of such stock by such fund if (without regard to section 1291) a deduction would be allowable with respect to such gain under section 642(c)(3), (2) section 1293 shall not apply with respect to such stock, and (3) in determining whether section 1291 ap- plies to any distribution in respect of such stock, subsection (d) of section 1291 shall not apply. (d) Treatment of certain leased property For purposes of this part— (1) In general Any tangible personal property with respect to which a foreign corporation is the lessee under a lease with a term of at least 12 months shall be treated as an asset actually held by such corporation. (2) Amount taken into account (A) In general The amount taken into account under sec- tion 1297(a)(2) with respect to any asset to which paragraph (1) applies shall be the unamortized portion (as determined under regulations prescribed by the Secretary) of the present value of the payments under the lease for the use of such property. (B) Present value For purposes of subparagraph (A), the present value of payments described in sub- paragraph (A) shall be determined in the manner provided in regulations prescribed by the Secretary— (i) as of the beginning of the lease term, and (ii) except as provided in such regula- tions, by using a discount rate equal to the applicable Federal rate determined under section 1274(d)— (I) by substituting the lease term for the term of the debt instrument, and (II) without regard to paragraph (2) or (3) thereof. (3) Exceptions This subsection shall not apply in any case where— (A) the lessor is a related person (as de- fined in section 954(d)(3)) with respect to the foreign corporation, or (B) a principal purpose of leasing the prop- erty was to avoid the provisions of this part. (e) Special rules for certain intangibles For purposes of this part— (1) Research expenditures The adjusted basis of the total assets of a controlled foreign corporation shall be in- Page 2422 TITLE 26—INTERNAL REVENUE CODE § 1298 creased by the research or experimental ex- penditures (within the meaning of section 174) paid or incurred by such foreign corporation during the taxable year and the preceding 2 taxable years. Any expenditure otherwise taken into account under the preceding sen- tence shall be reduced by the amount of any reimbursement received by the controlled for- eign corporation with respect to such expendi- ture. (2) Certain licensed intangibles (A) In general In the case of any intangible property (as defined in section 367(d)(4)) with respect to which a controlled foreign corporation is a licensee and which is used by such foreign corporation in the active conduct of a trade or business, the adjusted basis of the total assets of such foreign corporation shall be increased by an amount equal to 300 percent of the payments made during the taxable year by such foreign corporation for the use of such intangible property. (B) Exceptions Subparagraph (A) shall not apply to— (i) any payments to a foreign person if such foreign person is a related person (as defined in section 954(d)(3)) with respect to the controlled foreign corporation, and (ii) any payments under a license if a principal purpose of entering into such li- cense was to avoid the provisions of this part. (3) Controlled foreign corporation For purposes of this subsection, the term ‘‘controlled foreign corporation’’ has the meaning given such term by section 957(a). (f) Reporting requirement Except as otherwise provided by the Sec- retary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require. (g) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part. (Added Pub. L. 99–514, title XII, § 1235(a), Oct. 22, 1986, 100 Stat. 2573, § 1297; amended Pub. L. 100–647, title I, § 1012(p)(10), (17), (20), (22), (24), (35), (36), Nov. 10, 1988, 102 Stat. 3517–3519, 3522; Pub. L. 101–239, title VII, § 7811(i)(4), Dec. 19, 1989, 103 Stat. 2410; Pub. L. 103–66, title XIII, § 13231(d)(2), (4), Aug. 10, 1993, 107 Stat. 499; Pub. L. 104–188, title I, §§ 1501(b)(10), (11), 1703(i)(5), (6), Aug. 20, 1996, 110 Stat. 1826, 1876; renumbered § 1298 and amended Pub. L. 105–34, title XI, § 1122(a), (e), Aug. 5, 1997, 111 Stat. 972, 977; Pub. L. 105–206, title VI, § 6011(b)(2), July 22, 1998, 112 Stat. 818; Pub. L. 110–172, § 11(a)(24)(C), (f)(2), Dec. 29, 2007, 121 Stat. 2487, 2489; Pub. L. 111–147, title V, § 521(a), Mar. 18, 2010, 124 Stat. 112; Pub. L. 115–141, div. U, title IV, § 401(a)(184)–(186), (d)(1)(D)(viii)(III), Mar. 23, 2018, 132 Stat. 1193, 1207.) Editorial Notes AMENDMENTS 2018—Subsec. (b)(5)(B). Pub. L. 115–141, § 401(a)(184), substituted ‘‘section 951(c)’’ for ‘‘section 951(f)’’. Subsec. (d)(2)(A). Pub. L. 115–141, § 401(a)(185), sub- stituted ‘‘section 1297(a)(2)’’ for ‘‘section 1296(a)(2)’’. Subsec. (e)(2)(A). Pub. L. 115–141, § 401(d)(1)(D)(viii)(III), substituted ‘‘section 367(d)(4)’’ for ‘‘section 936(h)(3)(B)’’. Subsec. (e)(2)(B)(ii). Pub. L. 115–141, § 401(a)(186), sub- stituted ‘‘provisions’’ for ‘‘provisons’’. 2010—Subsecs. (f), (g). Pub. L. 111–147 added subsec. (f) and redesignated former subsec. (f) as (g). 2007—Subsec. (a)(2)(B). Pub. L. 110–172, § 11(a)(24)(C), substituted ‘‘Section 1297(d)’’ for ‘‘Section 1297(e)’’. Subsec. (b)(7) to (9). Pub. L. 110–172, § 11(f)(2), redesig- nated pars. (8) and (9) as (7) and (8), respectively, and struck out former par. (7) which read as follows: ‘‘Sec- tion 1246 shall not apply to earnings and profits of any company for any taxable year beginning after Decem- ber 31, 1986, if such company is a passive foreign invest- ment company for such taxable year.’’ 1998—Subsec. (a)(2)(B). Pub. L. 105–206 inserted at end ‘‘Section 1297(e) shall not apply in determining whether a corporation is a passive foreign investment company for purposes of this subparagraph.’’ 1997—Pub. L. 105–34, § 1122(a), renumbered section 1297 of this title as this section. Subsec. (b)(1). Pub. L. 105–34, § 1122(e), inserted ‘‘(de- termined without regard to the preceding sentence)’’ after ‘‘investment company’’ in last sentence. 1996—Subsec. (b)(9). Pub. L. 104–188, § 1501(b)(10), sub- stituted ‘‘section 951(a)(1)(B)’’ for ‘‘subparagraph (B) or (C) of section 951(a)(1)’’. Subsec. (d)(2). Pub. L. 104–188, § 1703(i)(5)(B), in head- ing substituted ‘‘Amount taken into account’’ for ‘‘De- termination of adjusted basis’’. Subsec. (d)(2)(A). Pub. L. 104–188, § 1703(i)(5)(A), sub- stituted ‘‘The amount taken into account under section 1296(a)(2) with respect to any asset’’ for ‘‘The adjusted basis of any asset’’. Subsec. (d)(3)(B). Pub. L. 104–188, § 1501(b)(11), struck out ‘‘or section 956A’’ after ‘‘this part’’. Subsec. (e). Pub. L. 104–188, § 1703(i)(6), inserted ‘‘For purposes of this part—’’ after heading. Subsec. (e)(2)(B)(ii). Pub. L. 104–188, § 1501(b)(11), struck out ‘‘or section 956A’’ after ‘‘this part’’. 1993—Subsec. (b)(9). Pub. L. 103–66, § 13231(d)(2), added par. (9). Subsecs. (d) to (f). Pub. L. 103–66, § 13231(d)(4), added subsecs. (d) and (e) and redesignated former subsec. (d) as (f). 1989—Subsec. (b)(5). Pub. L. 101–239, § 7811(i)(4)(A), sub- stituted ‘‘where stock held’’ for ‘‘where held’’ in head- ing. Subsec. (b)(5)(A). Pub. L. 101–239, § 7811(i)(4)(C), sub- stituted ‘‘treated as a disposition by, or distribution to’’ for ‘‘treated as a disposition to’’ in concluding pro- visions. Subsec. (b)(5)(A)(ii). Pub. L. 101–239, § 7811(i)(4)(B), substituted ‘‘any distribution of’’ for ‘‘any disposition of’’. 1988—Subsec. (a)(4). Pub. L. 100–647, § 1012(p)(10)(A), added par. (4). Former par. (4) redesignated (5). Subsec. (a)(5). Pub. L. 100–647, § 1012(p)(10), redesig- nated par. (4) as (5) and substituted ‘‘paragraph (2), (3), or (4)’’ for ‘‘paragraph (2) or (3)’’. Subsec. (b)(1). Pub. L. 100–647, § 1012(p)(36), substituted ‘‘investment company which’’ for ‘‘investment corpora- tion which’’. Subsec. (b)(3)(A). Pub. L. 100–647, § 1012(p)(22), amend- ed subpar. (A) generally. Prior to amendment, subpar. (A) read as follows: ‘‘such corporation (and any prede- cessor) was not a passive foreign investment corpora- tion for any prior taxable year,’’. Subsec. (b)(5). Pub. L. 100–647, § 1012(p)(17), substituted ‘‘part where held’’ for ‘‘section where stock held’’ in heading, and amended text generally. Prior to amend- ment, text read as follows: ‘‘Under regulations, in any Page 2423 TITLE 26—INTERNAL REVENUE CODE § 1301 case in which a United States person is treated as hold- ing stock in a passive foreign investment company by reason of subsection (a), any disposition by the United States person or the person holding such stock which results in the United States person being treated as no longer holding such stock, shall be treated as a disposi- tion by the United States person with respect to stock in the passive foreign investment company.’’ Subsec. (b)(6). Pub. L. 100–647, § 1012(p)(20), substituted ‘‘Except as provided in regulations, if a’’ for ‘‘If a’’. Subsec. (b)(8). Pub. L. 100–647, § 1012(p)(24), added par. (8). Subsecs. (c), (d). Pub. L. 100–647, § 1012(p)(35), added subsec. (c) and redesignated former subsec. (c) as (d). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2007 AMENDMENT Amendment by section 11(f)(2) of Pub. L. 110–172 effec- tive as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 11(f)(4) of Pub. L. 110–172, set out as a note under section 904 of this title. EFFECTIVE DATE OF 1998 AMENDMENT Amendment by Pub. L. 105–206 effective, except as otherwise provided, as if included in the provisions of the Taxpayer Relief Act of 1997, Pub. L. 105–34, to which such amendment relates, see section 6024 of Pub. L. 105–206, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to taxable years of United States persons beginning after Dec. 31, 1997, and to taxable years of foreign corporations end- ing with or within such taxable years of United States persons, see section 1124 of Pub. L. 105–34, set out as a note under section 532 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Amendment by section 1501(b)(10), (11) of Pub. L. 104–188 applicable to taxable years of foreign corpora- tions beginning after Dec. 31, 1996, and to taxable years of United States shareholders within which or with which such taxable years of foreign corporations end, see section 1501(d) of Pub. L. 104–188, set out as a note under section 904 of this title. Amendment by section 1703(i)(5), (6) of Pub. L. 104–188 effective as if included in the provision of the Revenue Reconciliation Act of 1993, Pub. L. 103–66, §§ 13001–13444, to which such amendment relates, see section 1703(o) of Pub. L. 104–188, set out as a note under section 39 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable to taxable years of foreign corporations beginning after Sept. 30, 1993, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, see section 13231(e) of Pub. L. 103–66, set out as a note under section 951 of this title. EFFECTIVE DATE OF 1989 AMENDMENT Amendment by Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE Section applicable to taxable years of foreign cor- porations beginning after Dec. 31, 1986, see section 1235(h) of Pub. L. 99–514, set out as a note under section 1291 of this title. SAVINGS PROVISION For provisions that nothing in amendment by section 401(d)(1)(D)(viii)(III) of Pub. L. 115–141 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Mar. 23, 2018, for purposes of determining liability for tax for periods ending after Mar. 23, 2018, see section 401(e) of Pub. L. 115–141, set out as a note under section 23 of this title. Subchapter Q—Readjustment of Tax Between Years and Special Limitations Part I. Income averaging. II. Mitigation of effect of limitations and other provisions. [III, IV. Repealed.] V. Claim of right. [VI. Repealed.] VII. Recoveries of foreign expropriation losses. Editorial Notes AMENDMENTS 1997—Pub. L. 105–34, title IX, § 933(b), Aug. 5, 1997, 111 Stat. 882, added item for part I. 1986—Pub. L. 99–514, title I, § 141(c), Oct. 22, 1986, 100 Stat. 2117, struck out item for part I ‘‘Income aver- aging’’. 1981—Pub. L. 97–34, title I, § 101(c)(2)(C), Aug. 13, 1981, 95 Stat. 183, struck out item for part VI ‘‘Maximum rate on personal service income’’. 1976—Pub. L. 94–455, title XIX, §§ 1901(b)(36)(E), (37)(F), 1951(c)(3)(D), Oct. 4, 1976, 90 Stat. 1802, 1803, 1841, struck out items for parts III and IV ‘‘Involuntary liquidation and replacement of LIFO inventories’’ and ‘‘War loss recoveries’’, respectively, and substituted in item for part VI ‘‘Maximum rate on personal service income’’ for ‘‘Other limitations’’. 1966—Pub. L. 89–384, § 1(g)(1), Apr. 8, 1966, 80 Stat. 104, added item for part VII. 1964—Pub. L. 88–272, title II, § 232(f)(3), Feb. 26, 1964, 78 Stat. 112, substituted ‘‘averaging’’ for ‘‘attributable to several taxable years’’ in item for part I. PART I—INCOME AVERAGING Sec. 1301. Averaging of farm income. Editorial Notes PRIOR PROVISIONS A prior part I consisted of sections 1301 to 1305, prior to repeal by Pub. L. 99–514, title I, § 141(a), Oct. 22, 1986, 100 Stat. 2117. § 1301. Averaging of farm income (a) In general At the election of an individual engaged in a farming business or fishing business, the tax im- posed by section 1 for such taxable year shall be equal to the sum of— (1) a tax computed under such section on taxable income reduced by elected farm in- come, plus (2) the increase in tax imposed by section 1 which would result if taxable income for each of the 3 prior taxable years were increased by an amount equal to one-third of the elected farm income. Any adjustment under this section for any tax- able year shall be taken into account in apply- ing this section for any subsequent taxable year.