n-14-28.pdf

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# Part III - Administrative, Procedural and Miscellaneous

Treatment of United States Persons that Own Stock of Passive Foreign Investment
Companies Through Certain Organizations and Accounts that Are Tax Exempt

Notice 2014-28

## SECTION 1. PURPOSE

This notice announces that the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) will amend the regulations under
section 1291 of the Internal Revenue Code (Code) to provide guidance concerning the
treatment of United States persons (U.S. persons) that own stock of a passive foreign
investment company within the meaning of section 1297(a) (PFIC) through: an
organization or an account that is exempt from tax under section 501(a) because it is
described in section 501(c), 501(d), or 401(a); a state college or university described in
section 511(a)(2)(B); a plan described in section 403(b) or 457(b); an individual
retirement plan or annuity as defined in section 7701(a)(37); or a qualified tuition
program described in section 529 or 530.

SECTION 2. BACKGROUND

.01 Sections 1291 and 1298

Section 1291 imposes a special tax and interest charge on a U.S. person that is
a shareholder of a PFIC and receives an excess distribution (within the meaning of
section 1291(b)) from the PFIC or recognizes gain derived from a disposition of the

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PFIC that is treated as an excess distribution (within the meaning of section 1291(a)(2)).
Section 1298(a) sets forth attribution rules that treat a U.S. person as the owner of PFIC
stock that is owned by another person. The section 1298(a) attribution rules will not
apply to treat stock owned (or treated as owned) by a U.S. person as owned by any
other person, except to the extent provided in regulations. Section 1298(a)(1)(B).
Section 1298(f) provides that a U.S. person that is a shareholder of a PFIC must file an
annual report containing the information required by the Secretary. Section 1298(g)
provides that the Secretary shall provide such regulations as may be necessary or
appropriate to carry out the purposes of sections 1291 through 1298.
.02 Regulations under Sections 1291 and 1298

On December 31, 2013, the Treasury Department and the IRS published
temporary and proposed regulations under sections 1291 and 1298 (2014-3 I.R.B. 394)
that defined the terms shareholder and indirect shareholder for purposes of section
1291. See §1.1291-1T(b)(7) and (8). These definitions are cross-referenced in the
definition of shareholder and indirect shareholder in the section 1298(f) information
reporting regulations, as well as in other PFIC regulations. See §§1.1291-9T(j), 1.1298-
1T(a). Under §1.1291-1T(b)(7), the term shareholder means any U.S. person that owns
stock of a PFIC directly or indirectly. Section 1.1291-1T(b)(8) defines the term indirect
shareholder as a U.S. person that indirectly owns stock of a PFIC, and provides rules
for attributing ownership of PFIC stock through domestic and foreign corporations,
partnerships, S corporations, estates, and trusts. For example, §1.1291-1T(b)(8)(iii)(C)
provides that, in general, each beneficiary of a foreign or domestic nongrantor trust that
directly or indirectly owns stock of a PFIC is considered to own a proportionate amount

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of the PFIC stock and, thus, each beneficiary that is a U.S. person is an indirect
shareholder of the PFIC.

### .03 Tax Exempt Organizations

In general, §1.1291-1(e) provides that section 1291 applies to a PFIC
shareholder that is an organization exempt from tax under chapter 1 of the Code only if
a dividend from the PFIC owned by the organization would be taxable to the
organization under subchapter F of Subtitle A of the Code (sections 501 through 530)
(subchapter F). Section 1.1298-1T(c)(1) provides that a PFIC shareholder that is an
organization exempt from tax under section 501(a) because it is described in section
501(c), 501(d), or 401(a), a state college or university described in section 511(a)(2)(B),
a plan described in section 403(b) or 457(b), an individual retirement plan or annuity as
defined in section 7701(a)(37), or a qualified tuition program described in section 529 or
530 (each a tax exempt organization or account) is required to file an annual report
under section 1298(f) with respect to a PFIC only if income derived with respect to the
PFIC would be taxable to the organization or account under subchapter F.

Neither the Code nor the section 1291 regulations provide specific guidance on
the application of section 1291 to a U.S. person that owns stock of a PFIC through a tax
exempt organization or account, other than an employees' trust described in section
401(a) that is exempt from tax under section 501(a) (section 401(a) trust). The
attribution rules that generally apply to treat a U.S. beneficiary of a nongrantor trust as
owning PFIC stock owned by the trust do not apply to a U.S. person that owns an
interest in a section 401(a) trust. §1.1291-1T(b)(8)(iii)(C). Thus, a U.S. person that is a

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beneficiary of a section 401(a) trust is not treated as an indirect shareholder with
respect to any PFIC stock held by the trust for purposes of section 1291.

Although §1.1291-1(e) provides that organizations exempt from tax under
chapter 1 of the Code generally are not subject to section 1291 with respect to their
direct or indirect ownership of PFIC stock, a U.S. person that is a beneficiary of or has
an interest in a tax exempt organization or account may be treated as a direct or indirect
shareholder of the PFIC stock owned by the organization or account under §1.1291-
1T(b)(7) and (8), and thus may be subject to taxation under section 1291.

SECTION 3. TREATMENT OF U.S. PERSONS THAT OWN STOCK OF A PFIC
THROUGH CERTAIN ORGANIZATIONS AND ACCOUNTS THAT ARE TAX EXEMPT

The Treasury Department and the IRS believe that the application of the PFIC
rules to a U.S. person treated as owning stock of a PFIC through a tax exempt
organization or account described in §1.1298-1T(c)(1) would be inconsistent with the
tax policies underlying the PFIC rules and the tax provisions applicable to tax exempt
organizations and accounts. For example, applying the PFIC rules to a U.S. person that
is treated as a shareholder of a PFIC through the U.S. person's ownership of an
individual retirement account (IRA) described in section 408(a) that owns stock of a
PFIC would be inconsistent with the principle of deferred taxation provided by
IRAs. Accordingly, the Treasury Department and the IRS will amend the definition of
shareholder in the section 1291 regulations to provide that a U.S. person that owns
stock of a PFIC through a tax exempt organization or account (as described in §1.1298-
1T(c)(1)) is not treated as a shareholder of the PFIC. This amendment will affect all
regulations that cross-reference the §1.1291-1T(b)(7) and (8) definitions of shareholder
and indirect shareholder, including §1.1298-1T(a).

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# SECTION 4. EFFECTIVE DATE

The regulations incorporating the guidance described in this notice will be
effective for taxable years of U.S. persons that own stock of a PFIC through a tax
exempt organization or account ending on or after December 31, 2013.

# SECTION 5. DRAFTING INFORMATION

The principal author of this notice is Susan E. Massey of the Office of Associate
Chief Counsel (International). For further information regarding this notice contact
Susan Massey at (202) 317-6934 (not a toll-free call).