AMOUNT OF CONTRIBUTION OF PFIC STOCK REDUCED BY FULL GAIN IF SECTIONS 1295 AND 170 ELECTIONS ARE MADE.

UIL Number(s) 1297.09-00, 0170.11-00

                                             Date: August 22, 1989

This is in repay to your letter dated April 5, 1989, in which rulings were requested concerning a proposed charitable contribution of stock of a passive foreign investment company (PFIC).

A, a U.S. person, has owned stock of FC, a foreign corpora-tion, since he purchased x shares on date d. As a result of stock splits, A now holds y shares.

From date e to date f, FC was a foreign investment company (FIC) within the meaning of section 1246(b) of the Internal Revenue Code of 1986. FC qualified as a PFIC within the meaning of section 1296(a) for its taxable year ending date g. A plans to make the election under section 1295 to treat FC as a qualified electing fund (QEF) for FC's first year as a PFIC. A also plans to contribute all his FC stock to U, a university that A states is an educational organization described in section 170(b)(1)(A)(ii).

Section 1291 of the Code applies special tax rules to distributions by PFICs and dispositions of stock of PFICs. Section 1291(f) provides that a transfer of stock of a PFIC will be a taxable disposition by the shareholder notwithstanding an otherwise applicable nonrecognition provision. Generally, a gift of property, including stock of a company, does not result in the recognition of gain or loss to the donor. However, unless otherwise provided in regulations under section 1291(f), a gift of appreciated stock of a PFIC will result in the donor's recognition of gain.

Section 1291(d)(1) of the Code provides that section 1291 will not apply to any distribution or disposition if the PFIC has been a QEF for all its PFIC years included in the shareholder's holding period. Therefore, section 1291(f) would not apply to the contribution of the FC stock if A elects under section 1295 to treat FC as a QEF for FC's first taxable year as a PFIC.

Section 1246(a)(1) of the Code provides that in the case of a post-1962 sale or exchange of stock of a foreign corporation that was a FIC at any time during the period during which the taxpayer held such stock, any gain shall be treated as ordinary income to the extent of the taxpayer's ratable share (determined under section 1246(a)(2)) of the earnings and profits of the corporation accumulated in taxable years beginning after December 31, 1962.

Section 1297(b)(7) of the Code provides that section 1246 does not apply to the earnings and profits of any company for any taxable year beginning after December 31, 1986, if such company is a PFIC for that taxable year. Section 1246 therefore does not apply to the earnings and profits of FC for its first taxable year as a PFIC ended date g, or to any subsequent year in which it is a PFIC. Section 1246 therefore would only apply to FC's accumulated earnings and profits for its taxable years ended on or before date f, when it was a FIC but not a PFIC, and any subsequent year when it is not a PFIC. Accordingly, if A were to sell or exchange his FC stock, A's gain, to the extent of his ratable share of FC's accumulated earnings and profits for the period beginning date e and ending date f, and for any taxable year after 1986 that FC is not a PFIC, would be ordinary income. A is unable to determine the amount of his gain, and therefore whether all or a portion of his gain would be ordinary income, until the date of the contribution.

Both section 170(e)(1)(A) and section 170(b)(1)(C) of the Code apply when a donor makes a charitable contribution of property, the sale or exchange of which would have resulted in both ordinary income and long term capital gain. See section 1.170A-8(f), example 13.

Section 170(e)(1)(A) of the Code provides that the amount of a charitable contribution will be reduced by the amount of ordinary income that would have resulted had the contributed property been sold at its fair market value at the time of the contribution. The stock is treated as ordinary income property subject to section 170(e)(1)(A) if any portion of the gain on a hypothetical sale or exchange would be ordinary income.

Section 170(b)(1)(C) of the Code provides that in the case of charitable contributions of appreciated long term capital gain property, that are not subject to mandatory reduction under section 170(e)(1)(B), the donor is limited to a deduction in the amount of 30 percent of the donor's contribution base (generally, adjusted gross income) for the taxable year. Any excess may be carried forward for five years.

Section 170(b)(1)(C)(iv) of the Code provides that property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long term capital gain. It is not necessary that all the gain be long term capital gain for the property to be capital gain property subject to the 30-percent contribution deduction limitation. Section 1.170A-8(c)(3) of the Income Tax Regulations provides that a capital asset will be treated as 30-percent capital gain property if all or any portion of the gain would be long term capital gain if the property were sold on the date of its contribution, provided the contribution is not required to be reduced under section 170(e)(1)(B).

Contributions of stock to a public charity are not subject to mandatory reduction under section 170(e)(1)(B) of the Code. However, a taxpayer may elect under section 170(b)(1)(C)(iii) to apply section 170(e)(1)(B) to any contribution of appreciated capital gain property. By making the election, the amount of the contribution is reduced by any gain that would have been long term capital gain had the property been sold. If the election is made, the taxpayer is entitled to deduct the reduced amounts up to 50 percent of his contribution base.

Accordingly, if all the gain that would have been recognized if appreciated stock of a corporation were sold or exchanged on the date of its contribution would have been treated as ordinary income, or the taxpayer elects under section 170(b)(1)(C)(iii) of the Code to be subject to the reduction of section 170(e)(1)(B), the stock would not be capital gain property subject to the 30-percent limit of section 170(b)(1)(C).

Based on the information and representations provided, and provided A makes an effective election under section 1295 to treat FC as a QEF for its first taxable year as a PFIC, it is held as follows:

(1) All or a portion of the gain that would be recognized on a sale or exchange of the FC stock on the date of the contribution will be ordinary income to the extent of A's ratable share of the post- 1962 accumulated earnings and profits, if any, of FC. Sections 1297(b)(7) and 1246.

(2) The stock of FC is capital gain property subject to the 30- percent limit of section 170(b)(1)(C) if any portion of the gain that would be recognized to A if he sold the FC stock on the date of contribution to U would be long term capital gain and A does not make the election under section 170(b)(1)(C)(iii).

(3) The amount of the charitable contribution to U of the FC stock is reduced by the portion of the gain that would have been ordinary income if A were to sell the stock on the date of the contribution to U at its fair market value on that date. If A makes the election under section 170(b)(1)(C)(iii), the amount of the charitable contribution will be reduced by the full amount of the gain. Section 170(e)(1).

No opinion is expressed about the tax treatment of the transfer of the FC stock under any other provision of the Code or regulations that may be applicable or the tax treatment of any conditions existing at the time of or for facts resulting from the transfer not specifically covered by the above rulings.

This ruling letter is directed only to A, on whose behalf the letter was requested. Section 6110(j)(3) of the Code provides that this ruling letter may not be used or cited as precedent.

A copy of this ruling letter should be attached to A's income tax return for the taxable year of the charitable contribution.

                                   Sincerely,