26 U.S.C. § 1296 — Election of mark to market for market-

Page 2414 TITLE 26—INTERNAL REVENUE CODE § 1296 the 15th day of the 3rd month of the following taxable year. To the extent provided in regulations, such an election may be made later than as required by the pre- ceding sentence in cases where the company failed to make a timely election because it reasonably believed it was not a passive foreign investment company.’’ Pub. L. 100–647, § 1012(p)(37)(A), inserted sentence at end of par. (2) permitting a later election when a com- pany reasonably believed it was not a passive foreign investment company. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1988 AMENDMENT Amendment by section 1012(p)(37)(A) of Pub. L. 100–647 effective, except as otherwise provided, as if in- cluded 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. Pub. L. 100–647, title VI, § 6127(c), Nov. 10, 1988, 102 Stat. 3715, provided that: ‘‘(1) IN GENERAL.—The amendments made by this sec- tion [amending this section and section 1291 of this title] shall take effect as if included in the amendments made by section 1235 of the Reform Act [Pub. L. 99–514]. ‘‘(2) TIME FOR MAKING ELECTION.—The period during which an election under section 1295(b) of the 1986 Code may be made shall in no event expire before the date 60 days after the date of the enactment of this Act [Nov. 10, 1988].’’ 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. EXPIRATION OF SUBSECTION (b) ELECTION PERIOD Pub. L. 100–647, title I, § 1012(p)(37)(B), Nov. 10, 1988, 102 Stat. 3522, provided that: ‘‘The period during which an election under section 1295(b) of the 1986 Code may be made shall in no event expire before the date 60 days after the date of enactment of this Act [Nov. 10, 1988].’’ SUBPART C—ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK Sec. 1296. Election of mark to market for marketable stock. Editorial Notes PRIOR PROVISIONS A prior subpart C, consisting of sections 1296 and 1297 of this title, was redesignated subpart D consisting of sections 1297 and 1298. AMENDMENTS 1997—Pub. L. 105–34, title XI, § 1122(a), Aug. 5, 1997, 111 Stat. 972, added subpart C and item 1296. Former sub- part C redesignated D. § 1296. Election of mark to market for market- able stock (a) General rule In the case of marketable stock in a passive foreign investment company which is owned (or treated under subsection (g) as owned) by a United States person at the close of any taxable year of such person, at the election of such per- son— (1) If the fair market value of such stock as of the close of such taxable year exceeds its adjusted basis, such United States person shall include in gross income for such taxable year an amount equal to the amount of such excess. (2) If the adjusted basis of such stock ex- ceeds the fair market value of such stock as of the close of such taxable year, such United States person shall be allowed a deduction for such taxable year equal to the lesser of— (A) the amount of such excess, or (B) the unreversed inclusions with respect to such stock. (b) Basis adjustments (1) In general The adjusted basis of stock in a passive for- eign investment company— (A) shall be increased by the amount in- cluded in the gross income of the United States person under subsection (a)(1) with respect to such stock, and (B) shall be decreased by the amount al- lowed as a deduction to the United States person under subsection (a)(2) with respect to such stock. (2) Special rule for stock constructively owned In the case of stock in a passive foreign in- vestment company which the United States person is treated as owning under subsection (g)— (A) the adjustments under paragraph (1) shall apply to such stock in the hands of the person actually holding such stock but only for purposes of determining the subsequent treatment under this chapter of the United States person with respect to such stock, and (B) similar adjustments shall be made to the adjusted basis of the property by reason of which the United States person is treated as owning such stock. (c) Character and source rules (1) Ordinary treatment (A) Gain Any amount included in gross income under subsection (a)(1), and any gain on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect), shall be treated as ordi- nary income. (B) Loss Any— (i) amount allowed as a deduction under subsection (a)(2), and (ii) loss on the sale or other disposition of marketable stock in a passive foreign investment company (with respect to which an election under this section is in effect) to the extent that the amount of such loss does not exceed the unreversed inclusions with respect to such stock, shall be treated as an ordinary loss. The amount so treated shall be treated as a de- duction allowable in computing adjusted gross income. (2) Source The source of any amount included in gross income under subsection (a)(1) (or allowed as a Page 2415 TITLE 26—INTERNAL REVENUE CODE § 1296 deduction under subsection (a)(2)) shall be de- termined in the same manner as if such amount were gain or loss (as the case may be) from the sale of stock in the passive foreign investment company. (d) Unreversed inclusions For purposes of this section, the term ‘‘unre- versed inclusions’’ means, with respect to any stock in a passive foreign investment company, the excess (if any) of— (1) the amount included in gross income of the taxpayer under subsection (a)(1) with re- spect to such stock for prior taxable years, over (2) the amount allowed as a deduction under subsection (a)(2) with respect to such stock for prior taxable years. The amount referred to in paragraph (1) shall in- clude any amount which would have been in- cluded in gross income under subsection (a)(1) with respect to such stock for any prior taxable year but for section 1291. In the case of a regu- lated investment company which elected to mark to market the stock held by such company as of the last day of the taxable year preceding such company’s first taxable year for which such company elects the application of this section, the amount referred to in paragraph (1) shall in- clude amounts included in gross income under such mark to market with respect to such stock for prior taxable years. (e) Marketable stock For purposes of this section— (1) In general The term ‘‘marketable stock’’ means— (A) any stock which is regularly traded on— (i) a national securities exchange which is registered with the Securities and Ex- change Commission or the national mar- ket system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (ii) any exchange or other market which the Secretary determines has rules ade- quate to carry out the purposes of this part, (B) to the extent provided in regulations, stock in any foreign corporation which is comparable to a regulated investment com- pany and which offers for sale or has out- standing any stock of which it is the issuer and which is redeemable at its net asset value, and (C) to the extent provided in regulations, any option on stock described in subpara- graph (A) or (B). (2) Special rule for regulated investment com- panies In the case of any regulated investment company which is offering for sale or has out- standing any stock of which it is the issuer and which is redeemable at its net asset value, all stock in a passive foreign investment com- pany which it owns directly or indirectly shall be treated as marketable stock for purposes of this section. Except as provided in regula- tions, similar treatment as marketable stock shall apply in the case of any other regulated investment company which publishes net asset valuations at least annually. (f) Treatment of controlled foreign corporations which are shareholders in passive foreign in- vestment companies In the case of a foreign corporation which is a controlled foreign corporation and which owns (or is treated under subsection (g) as owning) stock in a passive foreign investment company— (1) this section (other than subsection (c)(2)) shall apply to such foreign corporation in the same manner as if such corporation were a United States person, and (2) for purposes of subpart F of part III of subchapter N— (A) any amount included in gross income under subsection (a)(1) shall be treated as foreign personal holding company income described in section 954(c)(1)(A), and (B) any amount allowed as a deduction under subsection (a)(2) shall be treated as a deduction allocable to foreign personal hold- ing company income so described. (g) Stock owned through certain foreign entities Except as provided in regulations— (1) In general For purposes of this section, stock owned, directly or indirectly, by or for a foreign part- nership or foreign trust or foreign estate shall be considered as being owned proportionately by its partners or beneficiaries. Stock consid- ered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. (2) Treatment of certain dispositions In any case in which a United States person is treated as owning stock in a passive foreign investment company by reason of paragraph (1)— (A) any disposition by the United States person or by any other person which results in the United States person being treated as no longer owning such stock, and (B) any disposition by the person owning such stock, shall be treated as a disposition by the United States person of the stock in the passive for- eign investment company. (h) Coordination with section 851(b) For purposes of section 851(b)(2), any amount included in gross income under subsection (a) shall be treated as a dividend. (i) Stock acquired from a decedent In the case of stock of a passive foreign invest- ment company which is acquired by bequest, de- vise, or inheritance (or by the decedent’s estate) and with respect to which an election under this section was in effect as of the date of the dece- dent’s death, notwithstanding section 1014, the basis of such stock in the hands of the person so acquiring it shall be the adjusted basis of such stock in the hands of the decedent immediately before his death (or, if lesser, the basis which would have been determined under section 1014 without regard to this subsection). Page 2416 TITLE 26—INTERNAL REVENUE CODE § 1296 (j) Coordination with section 1291 for first year of election (1) Taxpayers other than regulated investment companies (A) In general If the taxpayer elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, and if the requirements of subparagraph (B) are not satisfied, section 1291 shall apply to— (i) any distributions with respect to, or disposition of, such stock in the first tax- able year of the taxpayer for which such election is made, and (ii) any amount which, but for section 1291, would have been included in gross in- come under subsection (a) with respect to such stock for such taxable year in the same manner as if such amount were gain on the disposition of such stock. (B) Requirements The requirements of this subparagraph are met if, with respect to each of such corpora- tion’s taxable years for which such corpora- tion was a passive foreign investment com- pany and which begin after December 31, 1986, and included any portion of the tax- payer’s holding period in such stock, such corporation was treated as a qualified elect- ing fund under this part with respect to the taxpayer. (2) Special rules for regulated investment com- panies (A) In general If a regulated investment company elects the application of this section with respect to any marketable stock in a corporation after the beginning of the taxpayer’s holding period in such stock, then, with respect to such company’s first taxable year for which such company elects the application of this section with respect to such stock— (i) section 1291 shall not apply to such stock with respect to any distribution or disposition during, or amount included in gross income under this section for, such first taxable year, but (ii) such regulated investment com- pany’s tax under this chapter for such first taxable year shall be increased by the ag- gregate amount of interest which would have been determined under section 1291(c)(3) if section 1291 were applied with- out regard to this subparagraph. Clause (ii) shall not apply if for the pre- ceding taxable year the company elected to mark to market the stock held by such com- pany as of the last day of such preceding taxable year. (B) Disallowance of deduction No deduction shall be allowed to any regu- lated investment company for the increase in tax under subparagraph (A)(ii). (k) Election This section shall apply to marketable stock in a passive foreign investment company which is held by a United States person only if such person elects to apply this section with respect to such stock. Such an election shall apply to the taxable year for which made and all subse- quent taxable years unless— (1) such stock ceases to be marketable stock, or (2) the Secretary consents to the revocation of such election. (l) Transition rule for individuals becoming sub- ject to United States tax If any individual becomes a United States per- son in a taxable year beginning after December 31, 1997, solely for purposes of this section, the adjusted basis (before adjustments under sub- section (b)) of any marketable stock in a passive foreign investment company owned by such in- dividual on the first day of such taxable year shall be treated as being the greater of its fair market value on such first day or its adjusted basis on such first day. (Added Pub. L. 105–34, title XI, § 1122(a), Aug. 5, 1997, 111 Stat. 972; amended Pub. L. 105–206, title VI, § 6011(c)(3), July 22, 1998, 112 Stat. 818; Pub. L. 107–16, title V, § 542(e)(5)(C), June 7, 2001, 115 Stat. 85; Pub. L. 108–311, title IV, § 408(a)(19), Oct. 4, 2004, 118 Stat. 1192; Pub. L. 111–312, title III, § 301(a), Dec. 17, 2010, 124 Stat. 3300.) Editorial Notes REFERENCES IN TEXT Section 11A of the Securities and Exchange Act of 1934, referred to in subsec. (e)(1)(A)(i), is classified to section 78k–1 of Title 15, Commerce and Trade. PRIOR PROVISIONS A prior section 1296 was renumbered section 1297 of this title. AMENDMENTS 2010—Subsec. (i). Pub. L. 111–312 amended subsec. (i) to read as if amendment by Pub. L. 107–16, § 542(e)(5)(C), had never been enacted. See 2001 Amendment note below. 2004—Subsec. (h). Pub. L. 108–311 substituted ‘‘section 851(b)(2)’’ for ‘‘paragraphs (2) and (3) of section 851(b)’’. 2001—Subsec. (i). Pub. L. 107–16, § 542(e)(5)(C), struck out subsec. (i). Text read as follows: ‘‘In the case of stock of a passive foreign investment company which is acquired by bequest, devise, or inheritance (or by the decedent’s estate) and with respect to which an elec- tion under this section was in effect as of the date of the decedent’s death, notwithstanding section 1014, the basis of such stock in the hands of the person so acquir- ing it shall be the adjusted basis of such stock in the hands of the decedent immediately before his death (or, if lesser, the basis which would have been determined under section 1014 without regard to this subsection).’’ 1998—Subsec. (d). Pub. L. 105–206 inserted at end ‘‘In the case of a regulated investment company which elected to mark to market the stock held by such com- pany as of the last day of the taxable year preceding such company’s first taxable year for which such com- pany elects the application of this section, the amount referred to in paragraph (1) shall include amounts in- cluded in gross income under such mark to market with respect to such stock for prior taxable years.’’ Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2010 AMENDMENT Amendment by Pub. L. 111–312 applicable to estates of decedents dying, and transfers made after Dec. 31, Page 2417 TITLE 26—INTERNAL REVENUE CODE § 1297 2009, except as otherwise provided, see section 301(e) of Pub. L. 111–312, set out as an Effective and Termination Dates of 2010 Amendment note under section 121 of this title. EFFECTIVE DATE OF 2001 AMENDMENT Amendment by Pub. L. 107–16 applicable to estates of decedents dying after Dec. 31, 2009, see section 542(f)(1) of Pub. L. 107–16, set out as a note under section 121 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 Section applicable to taxable years of United States persons beginning after Dec. 31, 1997, and to taxable years of foreign corporations ending with or within such taxable years of United States persons, see section 1124 of Pub. L. 105–34, set out as an Effective Date of 1997 Amendment note under section 532 of this title. SUBPART D—GENERAL PROVISIONS Sec. 1297. Passive foreign investment company. 1298. Special rules. Editorial Notes AMENDMENTS 1997—Pub. L. 105–34, title XI, § 1122(a), (d)(5), Aug. 5, 1997, 111 Stat. 972, 977, redesignated subpart C of this part as this subpart and amended table of sections gen- erally, renumbering items 1296 and 1297 as 1297 and 1298, respectively. § 1297. Passive foreign investment company (a) In general For purposes of this part, except as otherwise provided in this subpart, the term ‘‘passive for- eign investment company’’ means any foreign corporation if— (1) 75 percent or more of the gross income of such corporation for the taxable year is pas- sive income, or (2) the average percentage of assets (as de- termined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent. (b) Passive income For purposes of this section— (1) In general Except as provided in paragraph (2), the term ‘‘passive income’’ means any income which is of a kind which would be foreign per- sonal holding company income as defined in section 954(c). (2) Exceptions Except as provided in regulations, the term ‘‘passive income’’ does not include any in- come— (A) derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation), (B) derived in the active conduct of an in- surance business by a qualifying insurance corporation (as defined in subsection (f)), (C) which is interest, a dividend, or a rent or royalty, which is received or accrued from a related person (within the meaning of sec- tion 954(d)(3)) to the extent such amount is properly allocable (under regulations pre- scribed by the Secretary) to income of such related person which is not passive income, or (D) which is export trade income of an ex- port trade corporation (as defined in section 971). For purposes of subparagraph (C), the term ‘‘related person’’ has the meaning given such term by section 954(d)(3) determined by sub- stituting ‘‘foreign corporation’’ for ‘‘con- trolled foreign corporation’’ each place it ap- pears in section 954(d)(3). (c) Look-thru in the case of 25-percent owned corporations If a foreign corporation owns (directly or indi- rectly) at least 25 percent (by value) of the stock of another corporation, for purposes of deter- mining whether such foreign corporation is a passive foreign investment company, such for- eign corporation shall be treated as if it— (1) held its proportionate share of the assets of such other corporation, and (2) received directly its proportionate share of the income of such other corporation. (d) Exception for United States shareholders of controlled foreign corporations (1) In general For purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation. (2) Qualified portion For purposes of this subsection, the term ‘‘qualified portion’’ means the portion of the shareholder’s holding period— (A) which is after December 31, 1997, and (B) during which the shareholder is a United States shareholder (as defined in sec- tion 951(b)) of the corporation and the cor- poration is a controlled foreign corporation. (3) New holding period if qualified portion ends (A) In general Except as provided in subparagraph (B), if the qualified portion of a shareholder’s hold- ing period with respect to any stock ends after December 31, 1997, solely for purposes of this part, the shareholder’s holding period with respect to such stock shall be treated as beginning as of the first day following such period. (B) Exception Subparagraph (A) shall not apply if such stock was, with respect to such shareholder, stock in a passive foreign investment com- pany at any time before the qualified por- tion of the shareholder’s holding period with