26 U.S.C. § 1291 — Interest on tax deferral
submitted 40 years ago by Pub. L. 99-514 to r/title-26-INTERNAL-REVENUE-CODE · 2,075 words · no verdicts yet
This section sets tax rules for excess distributions from and gains on passive foreign investment company stock. It allocates amounts across the holding period and adds deferred tax and interest.
(a) If a United States person* receives an excess distribution, allocate it ratably by day over the holding period; include as ordinary income only amounts allocated to the current year or pre-1987 periods specified in the section; and increase current-year tax by the deferred tax amount. Apply the same rules to recognized gain on disposition. The holding period follows section 1223, with the stated distribution and section 1296 exceptions, and “current year” is the distribution or disposition year. (b) An excess distribution is the part of a distribution above its ratable share of the total excess. Total excess is current-year distributions above 125 percent of the three-year average, or shorter-period average, with the stated treatment of prior excess distributions; it is zero in the first holding year. Regulations must make share-level determinations and adjustments for aggregation, splits, dividends, partial-year holding, prior holders, foreign currency, sections 959(a) and 1293(c), and section 642(c) charitable deductions. (c) The deferred tax amount is specified prior-year tax increases plus section 6621 interest from each prior due date to the current-year due date; the increases use the highest section 1 or 11 rate, and the current-year interest portion is treated as section 6601 interest. “Due date” excludes filing extensions. (d) The section does not apply when the company is a qualified electing fund* for all relevant years, generally does not apply to an effective section 1296(k) election or marked-to-market stock*, and allows the stated elections to recognize gain or include attributable post-1986 earnings as a dividend when a company becomes a qualified electing fund. The dividend is treated as an excess distribution and section 1248(a) income for section 959(e). Basis increases and the holding period restarts as stated. (e) Similar section 1246(c)-(e) rules apply, with the specified section 1014 basis reduction and nonresident-alien exception. (f) Regulations may require recognition of fair-market-value-over-basis gain on transfers otherwise not fully recognized, with basis adjustment. (g) Creditable foreign taxes are handled under section 78, allocated to the holding period, credited under section 901 for specified years, and otherwise reduce the section (c)(2) increase subject to section 904(d) and zero. “Creditable foreign taxes” and “excess distribution taxes” have the meanings stated in the section, and the rules also cover gain otherwise treated as a section 1248 dividend.
If a United States person* receives an excess distribution in respect of stock in a passive foreign investment company, then—
the amount of the excess distribution shall be allocated ratably to each day in the taxpayer’s holding period for the stock,
with respect to such excess distribution, the taxpayer’s gross income for the current year shall include (as ordinary income) only the amounts allocated under subparagraph (A) to—
the current year, or
any period in the taxpayer’s holding period before the 1st day of the 1st taxable year* of the company which begins after December 31, 1986, and for which it was a passive foreign investment company, and
the tax imposed by this chapter for the current year shall be increased by the deferred tax amount (determined under subsection (c)).
If the taxpayer* disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution.
For purposes of this section—
The taxpayer’s holding period shall be determined under section 1223; except that—
for purposes of applying this section to an excess distribution, such holding period shall be treated as ending on the date of such distribution, and
if section 1296 applied to such stock with respect to the taxpayer for any prior taxable year, such holding period shall be treated as beginning on the first day of the first taxable year beginning after the last taxable year for which section 1296 so applied.
The term “current year” means the taxable year in which the excess distribution or disposition occurs.
For purposes of this section, the term “excess distribution” means any distribution in respect of stock received during any taxable year to the extent such distribution does not exceed its ratable portion of the total excess distribution (if any) for such taxable year.
For purposes of this subsection—
The term “total excess distribution” means the excess (if any) of—
the amount of the distributions in respect of the stock received by the taxpayer during the taxable year, over
125 percent of the average amount received in respect of such stock by the taxpayer during the 3 preceding taxable years (or, if shorter, the portion of the taxpayer’s holding period before the taxable year).
For purposes of clause (ii), any excess distribution received during such 3-year period shall be taken into account only to the extent it was included in gross income under subsection (a)(1)(B).
The total excess distributions with respect to any stock shall be zero for the taxable year in which the taxpayer’s holding period in such stock begins.
Under regulations prescribed by the Secretary*—
determinations under this subsection shall be made on a share-by-share basis, except that shares* with the same holding period may be aggregated,
proper adjustments shall be made for stock splits and stock dividends,
if the taxpayer does not hold the stock during the entire taxable year, distributions received during such year shall be annualized,
if the taxpayer’s holding period includes periods during which the stock was held by another person, distributions received by such other person shall be taken into account as if received by the taxpayer,
if the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency and the amount of any excess distribution determined in such currency shall be translated into dollars,
proper adjustment shall be made for amounts not includible in gross income by reason of section 959(a) or 1293(c), and
if a charitable deduction was allowable under section 642(c) to a trust for any distribution of its income, proper adjustments shall be made for the deduction so allowable to the extent allocable to distributions or gain in respect of stock in a passive foreign investment company.
For purposes of this section—
The term “deferred tax amount” means, with respect to any distribution or disposition to which subsection (a) applies, an amount equal to the sum of—
the aggregate increases in taxes described in paragraph (2), plus
the aggregate amount of interest (determined in the manner provided under paragraph (3)) on such increases in tax.
Any increase in the tax imposed by this chapter for the current year under subsection (a) to the extent attributable to the amount referred to in subparagraph (B) shall be treated as interest paid under section 6601 on the due date for the current year.
For purposes of paragraph (1)(A), the aggregate increases in taxes shall be determined by multiplying each amount allocated under subsection (a)(1)(A) to any taxable year (other than any taxable year referred to in subsection (a)(1)(B)) by the highest rate of tax in effect for such taxable year under section 1 or 11, whichever applies.
The amount of interest referred to in paragraph (1)(B) on any increase determined under paragraph (2) for any taxable year shall be determined for the period—
beginning on the due date for such taxable year, and
ending on the due date for the taxable year with or within which the distribution or disposition occurs,
by using the rates and method applicable under section 6621 for underpayments of tax for such period.
For purposes of this subsection, the term “due date” means the date prescribed by law (determined without regard to extensions) for filing the return of the tax imposed by this chapter for the taxable year.
This section shall not apply with respect to any distribution paid by a passive foreign investment company, or any disposition of stock in a passive foreign investment company, if such company is a qualified electing fund* with respect to the taxpayer for each of its taxable years—
which begins after December 31, 1986, and for which such company is a passive foreign investment company, and
which includes any portion of the taxpayer’s holding period.
Except as provided in section 1296(j), this section also shall not apply if an election under section 1296(k) is in effect for the taxpayer’s taxable year. In the case of stock which is marked to market under section 475 or any other provision of this chapter, this section shall not apply, except that rules similar to the rules of section 1296(j) shall apply.
If—
a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986,
the taxpayer holds stock in such company on the first day of such taxable year, and
the taxpayer establishes to the satisfaction of the Secretary the fair market value of such stock on such first day,
the taxpayer may elect to recognize gain as if he sold such stock on such first day for such fair market value.
If—
a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986,
the taxpayer holds stock in such company on the first day of such taxable year, and
such company is a controlled foreign corporation* (as defined in section 957(a)),
the taxpayer may elect to include in gross income as a dividend received on such first day an amount equal to the portion of the post-1986 earnings and profits of such company attributable (under regulations prescribed by the Secretary) to the stock in such company held by the taxpayer on such first day. The amount treated as a dividend under the preceding sentence shall be treated as an excess distribution and shall be allocated under subsection (a)(1)(A) only to days during periods taken into account in determining the post-1986 earnings and profits so attributable.
For purposes of clause (i), the term “post-1986 earnings and profits” means earnings and profits which were accumulated in taxable years of such company beginning after December 31, 1986, and during the period or periods the stock was held by the taxpayer while the company was a passive foreign investment company.
For purposes of section 959(e), any amount included in gross income under this subparagraph shall be treated as included in gross income under section 1248(a).
In the case of any stock to which subparagraph (A) or (B) applies—
the adjusted basis of such stock shall be increased by the gain recognized under subparagraph (A) or the amount treated as a dividend under subparagraph (B), as the case may be, and
the taxpayer’s holding period in such stock shall be treated as beginning on the first day referred to in such subparagraph.
Except to the extent inconsistent with the regulations prescribed under subsection (f), rules similar to the rules of subsections (c), (d), and (e) of section 1246 (as in effect on the day before the date of the enactment of the American Jobs Creation Act of 2004) shall apply for purposes of this section; except that—
the reduction under subsection (e) of such section shall be the excess of the basis determined under section 1014 over the adjusted basis of the stock immediately before the decedent’s death, and
such a reduction shall not apply in the case of a decedent who was a nonresident alien at all times during his holding period in the stock.
To the extent provided in regulations, in the case of any transfer of stock in a passive foreign investment company where (but for this subsection) there is not full recognition of gain, the excess (if any) of—
the fair market value of such stock, over
its adjusted basis,
shall be treated as gain from the sale or exchange of such stock and shall be recognized notwithstanding any provision of law. Proper adjustment shall be made to the basis of any such stock for gain recognized under the preceding sentence.
If there are creditable foreign taxes with respect to any distribution in respect of stock in a passive foreign investment company—
the amount of such distribution shall be determined for purposes of this section with regard to section 78,
the excess distribution taxes shall be allocated ratably to each day in the taxpayer’s holding period for the stock, and
to the extent—
that such excess distribution taxes are allocated to a taxable year referred to in subsection (a)(1)(B), such taxes shall be taken into account under section 901 for the current year, and
that such excess distribution taxes are allocated to any other taxable year, such taxes shall reduce (subject to the principles of section 904(d) and not below zero) the increase in tax determined under subsection (c)(2) for such taxable year by reason of such distribution (but such taxes shall not be taken into account under section 901).
For purposes of this subsection—
The term “creditable foreign taxes” means, with respect to any distribution, any withholding tax imposed with respect to such distribution, but only if the taxpayer chooses the benefits of section 901 and such taxes are creditable under section 901 (determined without regard to paragraph (1)(C)(ii)).
The term “excess distribution taxes” means, with respect to any distribution, the portion of the creditable foreign taxes with respect to such distribution which is attributable (on a pro rata basis) to the portion of such distribution which is an excess distribution.
The rules of this subsection also shall apply in the case of any gain which but for this section would be includible in gross income as a dividend under section 1248.
Source credit: (Added Pub. L. 99–514, title XII, § 1235(a), Oct. 22, 1986, 100 Stat. 2566; amended Pub. L. 100–647, title I, § 1012(p)(1), (3), (6), (7), (9), (12)–(14), (28), (31), (33), title VI, § 6127(b), Nov. 10, 1988, 102 Stat. 3515–3517, 3520, 3521, 3715; Pub. L. 105–34, title XI, § 1122(b), Aug. 5, 1997, 111 Stat. 976; Pub. L. 105–206, title VI, § 6011(c)(2), July 22, 1998, 112 Stat. 818; Pub. L. 107–16, title V, § 542(e)(5)(B), June 7, 2001, 115 Stat. 85; Pub. L. 108–357, title IV, § 413(c)(24), Oct. 22, 2004, 118 Stat. 1509; Pub. L. 111–147, title V, § 521(b), Mar. 18, 2010, 124 Stat. 112; Pub. L. 111–312, title III, § 301(a), Dec. 17, 2010, 124 Stat. 3300; Pub. L. 115–97, title I, § 14301(c)(34), Dec. 22, 2017, 131 Stat. 2224; Pub. L. 115–141, div. U, title IV, § 401(a)(183), Mar. 23, 2018, 132 Stat. 1193.)
- 1986Enacted · Pub. L. 99-514 · 100 Stat. 2566
- 1988Amended · Pub. L. 100-647 · 102 Stat. 3515
- 1997Amended · Pub. L. 105-34 · 111 Stat. 976
- 1998Amended · Pub. L. 105-206 · 112 Stat. 818
- 2001Amended · Pub. L. 107-16 · 115 Stat. 85
- 2004Amended · Pub. L. 108-357 · 118 Stat. 1509
- 2010Amended · Pub. L. 111-147 · 124 Stat. 112
- 2010Amended · Pub. L. 111-312 · 124 Stat. 3300
- 2017Amended · Pub. L. 115-97 · 131 Stat. 2224
- 2018Amended · Pub. L. 115-141 · 132 Stat. 1193
A history note hasn’t been published yet. The record shows enactment by Pub. L. 99-514 on 1986-10-22.
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