[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1293-1]

[Page 597-598]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1293-1  Current taxation of income from qualified electing funds.

    (a) In general. [Reserved]
    (1) Other rules. [Reserved]
    (2) Net capital gain defined--(i) In general. This paragraph (a)(2) 
defines the term net capital gain for purposes of sections 1293 and 1295 
and the regulations under those sections. The QEF, as defined in Sec. 
1.1291-9(j)(2)(i), in determining its net capital gain for a taxable 
year, may either--
    (A) Calculate and report the amount of each category of long-term 
capital gain provided in section 1(h) that was recognized by the PFIC in 
the taxable year;
    (B) Calculate and report the amount of net capital gain recognized 
by the PFIC in the taxable year, stating that that amount is subject to 
the highest capital gain rate of tax applicable to the shareholder; or
    (C) Calculate its earnings and profits for the taxable year and 
report the entire amount as ordinary earnings.
    (ii) Effective date. Paragraph (a)(2)(i) of this section is 
applicable to sales by QEFs during their taxable years ending on or 
after May 7, 1997.
    (b) Other rules. [Reserved]
    (c) Application of rules of inclusion with respect to stock held by 
a pass through entity--(1) In general. If a domestic pass through entity 
makes a section 1295 election, as provided in paragraph (d)(2) of this 
section, with respect to the PFIC shares that it owns, directly or 
indirectly, the domestic pass through entity takes into account its pro 
rata share of the ordinary earnings and net capital gain attributable to 
the QEF shares held by the pass through entity. A U.S. person that 
indirectly owns QEF shares through the domestic pass through entity 
accounts for its pro rata shares of ordinary earnings and net capital 
gain attributable to the QEF shares according to the general rules 
applicable to inclusions of income from the domestic pass through 
entity. For the definition of pass through entity, see Sec. 1.1295-
1(j).
    (2) QEF stock transferred to a pass through entity--(i) Pass through 
entity makes a section 1295 election. If a shareholder transfers stock 
subject to a section 1295 election to a domestic pass through entity of 
which it is an interest holder and the pass through entity makes a 
section 1295 election with respect to that stock, as provided in Sec. 
1.1295-1(d)(2), the shareholder takes into account its pro rata shares 
of the ordinary earnings and net capital gain attributable to the QEF 
shares under the rules applicable to inclusions of income from the pass 
through entity.

[[Page 598]]

    (ii) Pass through entity does not make a section 1295 election. If 
the pass through entity does not make a section 1295 election with 
respect to the PFIC, the shares of which were transferred to the pass 
through entity subject to the 1295 election of the shareholder, the 
shareholder continues to be subject, in its capacity as an indirect 
shareholder, to the income inclusion rules of section 1293 and reporting 
rules required of shareholders of QEFs. Proper adjustments to reflect an 
inclusion in income under section 1293 by the indirect shareholder must 
be made, under the principles of Sec. 1.1291-9(f), to the basis of the 
indirect shareholder's interest in the pass through entity.
    (3) Effective date. Paragraph (c) of this section is applicable to 
taxable years of shareholders beginning after December 31, 1997.

[T.D. 8750, 63 FR 14, Jan. 2, 1998. Redesignated and amended by T.D. 
8870, 65 FR 5779, 5781, Feb. 7, 2000]