SECTION 5. FOREIGN PERSONAL

HOLDING COMPANIES

.01 In General

Section 1(h)(11)(C)(iii) of the Code excludes FPHCs from the definition of qualified foreign corporation. Therefore, actual dividends received by U.S. individ

PFIC, or the amount of any excess distribution (as defined under section 1291(b)), is treated as ordinary income earned pro rata over the shareholder’s holding period with respect to the PFIC stock. Amounts attributed to the current taxable year are included as ordinary income. Amounts attributed to prior years are subject to tax at the highest applicable tax rate in effect for each respective year of the holding period, and interest is imposed at the underpayment rate on the tax liability with respect to such amounts.

As an alternative to being taxed under the rules of section 1291(a) of the Code, a shareholder that is a U.S. person may make a qualified electing fund (QEF) election under section 1295 of the Code or a mark to market election under section 1296. In general, a U.S. shareholder that makes a QEF election must include in gross income its pro rata share of the QEF’s ordinary income and net capital gain for the taxable year. Section 1293(a). A U.S. shareholder of a PFIC that makes a mark to market election must include in gross income for its taxable year as ordinary income the excess of the fair market value of the PFIC stock over its adjusted basis. Section 1296(c)(1). The adjusted basis of the shareholder’s stock is increased by the amount included in the gross income of the shareholder with respect to the stock.

A foreign corporation may be treated as a PFIC with respect to some shareholders but not others. Under section 1298(b)(1), a foreign corporation generally is treated as a PFIC with respect to a shareholder even if the corporation does not meet the income or asset tests for the current year if the corporation met either the income test or the asset test during any portion of the shareholder’s holding period of the stock of the foreign corporation and the shareholder has not made a QEF election. ³ Under section 1297(e), a foreign corporation is not treated as a PFIC with respect to a shareholder even if the corporation meets the income test or the asset test if the corporation is a CFC, the shareholder

is a United States shareholder, and certain other conditions are met.