26 U.S.C. § 1293 — Current taxation of income from qualified electing funds

(a) Inclusion. (1) General rule. Every United States person^* who owns, or is treated under section 1298(a) as owning, stock^* in a qualified electing fund^* at any time during the fund's taxable year^* must include in gross income: (A) as ordinary income, the shareholder's pro rata share of the fund's ordinary earnings for that year; and (B) as long-term capital gain, the shareholder's pro rata share of the fund's net capital gain for that year. (2) Year of inclusion. The shareholder^* includes these amounts for the shareholder's taxable year in which, or with which, the fund's taxable year ends.

(b) Pro rata share. For a shareholder, the pro rata share is the amount that would have been distributed for the shareholder's stock if, on every day of the fund's taxable year, the fund had distributed to each shareholder that shareholder's proportional part of that day's proportional share of the fund's ordinary earnings and net capital gain for the year. Regulations may allow a shorter period if the fund satisfies the Secretary^* that it uses that shorter period to determine shareholders' interests in its earnings.

(c) Previously taxed amounts distributed tax free. If the taxpayer^* satisfies the Secretary that a distribution by a passive foreign investment company came from earnings and profits that were already included under subsection (a) in a United States person's income, the distribution is treated for this chapter as a distribution that is not a dividend. The distribution immediately reduces earnings and profits. If the passive foreign investment company is a controlled foreign corporation^* (as defined in section 957(a)), the first rule does not apply to a United States shareholder^* (as defined in section 951(b)) of that corporation^*. For section 959, an inclusion under this section is treated as an inclusion under section 951(a)(1)(A).

(d) Basis adjustments. The taxpayer's basis in stock of a passive foreign investment company is (1) increased by amounts included in the taxpayer's income under subsection (a) for that stock, and (2) decreased by amounts distributed for that stock that are not included in the taxpayer's income because of subsection (c). The same rule applies to property that causes the taxpayer to be treated under section 1298(a) as owning stock in a qualified electing fund.

(e) Ordinary earnings. For this section: (1) “Ordinary earnings” means the qualified electing fund's earnings and profits for the taxable year minus its net capital gain for that year. (2) A qualified electing fund's net capital gain for a taxable year may not exceed its earnings and profits for that year. (3) The fund's earnings and profits are determined without paragraphs (4), (5), and (6) of section 312(n). Regulations may provide that this rule does not apply when it would increase earnings and profits by an amount the fund previously distributed.

(f) Foreign tax credit allowed for a 10-percent corporate shareholder. For section 960: (1) an amount included under subsection (a) is treated as if included under section 951(a); (2) an amount excluded under subsection (c) is treated like an amount excluded under section 959; and (3) a domestic corporation owning, or treated under section 1298(a) as owning, qualified electing fund stock is treated like a United States shareholder of a controlled foreign corporation, and the fund is treated like that controlled foreign corporation, if the domestic corporation meets section 902(a) or (b)'s stock-ownership requirements as that section existed before repeal.

(g) Other special rules. (1) Exception for certain income. When determining a person's inclusion, the fund's ordinary earnings and net capital gain do not include an income item if (A) the fund is a controlled foreign corporation and the person is its United States shareholder, and (B) the person satisfies the Secretary that either (i) the income was subject to a foreign income-tax rate greater than 90 percent of the maximum rate in section 11, or (ii) the income is (I) from United States sources, (II) effectively connected with the fund's United States trade or business^*, and (III) not tax-exempt or subject to a reduced rate under a United States treaty obligation. (2) Prevention of double inclusion. The Secretary must prescribe adjustments needed to prevent the same fund income item from being included in a United States person's gross income more than once.