Proposed passive foreign investment company regulations.

On February 3, 1993, Tax Executives Institute submitted the following comments to the Internal Revenue Service on proposed regulations under sections 1291-1297 of the Internal Revenue Code, relating to passive foreign investment companies. The comments were prepared under the aegis of TEI's International Tax Committee, whose chair is Lisa Norton of Ingersoll-Rand Company. Richard L. Sartor of The Boeing Company, Karen A. Radtke of General Motors Corporation. and Joseph E. Bernot of NCR Corporation materially contributed to the preparation of the comments.

On March 31, 1992, the Internal Revenue Service issued proposed regulations under sections 1291-1297 of the Internal Revenue Code, relating to the treatment of shareholders of certain passive foreign investment companies. The regulations were published in the Federal Register on April 1, 1992 (57 Fed. Reg. 11024), and in 1992-1 C.B. 1124.

For simplicity's sake, the proposed regulations are referred to as the "proposed regulations." Specific provisions are cited as "Prop. Reg. [section]." References to page numbers are to the proposed regulations (and preamble) as published in the Cumulative Bulletin.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. Our 4,700 members represent more than 2,400 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association. TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

Members of TEI are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring an important, balanced, and practical perspective to the issues raised by the proposed regulations under sections 1291-1297 of the Code, relating to the treatment of shareholders of certain passive foreign investment companies.

Specific Comments

Under section 1296(a) of the Code, a foreign corporation is a passive foreign investment company (PFIC) if (1) 75 percent or more of its gross income during the taxable year consists of passive income, or (2) at least 50 percent of the average fair market value of its assets during the taxable year consists of assets that produce passive income or are held for the production of passive income. A U.S. shareholder that owns a PFIC must choose between the current taxation of income under section 1293 (by becoming a "qualified electing fund" (QEF) or the deferred tax amount and interest charge of section 1291.

Under section 1295(a), a shareholder of a PFIC can elect QEF status for any taxable year during which the foreign corporation is a PFIC and for any subsequent year, whether or not it meets section 1296(a)'s income and asset test. Section 1297(b)(1) of the Code provides that, once a foreign corporation attains PFIC status, it will maintain its PFIC status for all subsequent years (the "once a PFIC, always a PFIC" rule).

The proposed regulations effectively establish three PFIC classifications:

* A section 1291 non-qualified fund whose shareholder has not elected to treat such PFIC as a QEF. A U.S...