Menu
Tax Notes logo

PwC Seeks Changes for Look-Through Stock Under PFIC Regs

APR. 14, 2021

PwC Seeks Changes for Look-Through Stock Under PFIC Regs

DATED APR. 14, 2021
DOCUMENT ATTRIBUTES

April 14, 2021

CC:PA:LPD:PR (REG-111950-20)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: REG-111950-20 and T.D. 9936 — Comments on the Treasury Regulations under Sections 1291, 1297, and 1298 with respect to Passive Foreign Investment Companies

Dear Sir or Madam:

PricewaterhouseCoopers LLP respectfully submits this letter on behalf of a client in response to the proposed regulations (REG-111950-20) under sections 1297 and 1298 (the “2020 Proposed Regulations”) and final regulations (T.D. 9936) under sections 1291, 1297, and 1298 (the “Final Regulations”), issued by the Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS” or “Service”) on December 4, 2020 (published on January 15, 2021), regarding the determination of whether a foreign corporation is treated as a passive foreign investment company (“ PFIC”) for purposes of the Internal Revenue Code.1 We appreciate the opportunity to provide, and your consideration of, these comments.

I. Summary of Recommendations

For the reasons explained below, we believe it would be appropriate for Treasury and the Service, in finalizing the 2020 Proposed Regulations, to revise the treatment under the PFIC Asset Test (defined below) in the Final Regulations, and more specifically in Treas. Reg. § 1.1297-1(d)(3)(iii), of stock of a related person subject to the related-person look-through rule of section 1297(b)(2)(C) (“Look-Through Stock”) that does not pay dividends in the current year or within either of the prior two taxable years. In this regard, we respectfully submit the following recommendations:

A. Look-Through Stock in all cases should be characterized based on dividends (either past, current, or future), rather than on gain on sale.

B. Concerns about administrability or the speculative nature of characterizing future dividends could be mitigated through the adoption of safe harbors based on currently available information as well as a per se rule for cases in which a reasonable expectation of the character of future dividends cannot be established.

II. Detailed Discussion

A. Treatment of Look-Through Stock under the Final Regulations

On December 4, 2020, Treasury and the IRS issued the 2020 Proposed Regulations and the Final Regulations, which finalized — with modifications — the 2019 proposed regulations published on July 11, 2019 (the “2019 Proposed Regulations”).2 We commend the efforts of Treasury and IRS staff in issuing these rules, which provide needed guidance on several long-standing issues related to determining PFIC status of foreign corporations.

The Final Regulations, among other things, clarify the rules for determining whether stock of a related person under the related-person look-through rule of section 1297(b)(2)(C) (“Related-Person Look-Through Rule”) is passive or nonpassive for purposes of the application of the asset test provided under section 1297(a)(2) (“PFIC Asset Test”).

Under the Final Regulations, assets that give rise to income subject to the Related-Person Look-Through Rule generally are treated as passive or nonpassive assets to the extent the income that is received with respect to such assets is treated as passive or nonpassive by the tested foreign corporation.3 Look-Through Stock is characterized based on the character of dividends received in the current year or in the preceding two years.4 Stock on which dividends have not been paid for more than two years is treated as held for gain on a future sale, resulting in characterization of the stock as a passive asset (the “Future Gain Rule”).5

B. Comments

a. Look-Through Stock with respect to which no dividends are paid in the current year or within either of the prior two taxable years — Treatment under the PFIC Asset Test

Characterization of Look-Through Stock by reference to the character of dividends received in the current or prior two years is consistent with the 2019 Proposed Regulations.6 However, the Future Gain Rule is new. This rule was added to the Final Regulations in response to comments on the 2019 Proposed Regulations identifying the incomplete guidance offered by the rule in the 2019 Proposed Regulations, which only considered dividends received in the current or prior two years. Although comments generally requested that the approach in the 2019 Proposed Regulations (characterization of Look-Through Stock by reference to the character of dividends) be expanded to consider dividends received further in the past or reasonably expected to be received in the future, the Final Regulations did not adopt this approach; instead, the Final Regulations opted for the Future Gain Rule on the premise that dividends in the more distant past were not sufficiently relevant and characterization on the basis of hypothetical future dividends would be overly speculative.

In this regard, the preamble to the Final Regulations explains the adoption of the Future Gain Rule by reasoning that if stock “has not recently generated dividends, it is more appropriate to treat the stock as held for the production of gains upon disposition, which would generally be passive income.”7 The Treasury and IRS rejected the use of hypothetical future dividends, reasoning that “it would not be appropriate to allow stock to be treated as a non-passive asset on the basis of speculation that dividends might be received with respect to the stock and that such dividends could be non-passive under section 1297(b)(2)(C) as most of the comments' recommendations would provide.”8

While we appreciate the reasoning set forth in the preamble for the adoption of the Future Gain Rule, we strongly encourage Treasury and the IRS to reconsider the use of past and future dividends rather than gain on sale for purposes of characterizing Look-Through Stock.

First, we believe the characterization of Look-Through Stock based on the nature of gain upon its disposition (rather than based on the character of dividend payments) is at odds with the language and legislative history of the PFIC Asset Test as well as the IRS' general approach to characterizing assets set forth in Notice 88-22 and informal guidance for over 30 years, which all support the long-standing practice of looking to dividends (including future dividends) to characterize Look-Through Stock.9

Second, we believe that the application of the Future Gain Rule, while arguably simpler to apply, in practice could result in unnecessarily harsh and arbitrary results, in addition to providing disparate treatment of similarly situated taxpayers and requiring, in some cases, noneconomic behavior to avoid adverse outcomes under the PFIC Asset Test. On the other hand, characterizing Look-Through Stock based on the character of the dividend income that such stock is reasonably expected to generate in the reasonably foreseeable future, as recommended in this letter, is not any more (and arguably is less) speculative than the determination of future income streams from other types of assets (e.g., IP or real estate) and often may be reasonably ascertainable based on data and projections generated by the issuing company in the ordinary course of business.

Third, as further explained below, we believe that safe harbors based on currently available information and a per se rule for cases in which a reasonable expectation of the character of future dividends cannot be established could further mitigate any administrability concerns without the harsh and disparate results potentially created by the Future Gain Rule.

b. Recommendation: Look-Through Stock in all cases should be characterized based on dividends (either past, current, or future), rather than on gain on sale

i. The Future Gain Rule is inconsistent with the language and legislative history of the PFIC Asset Test and the IRS' historical approach

Section 1297(a) characterizes assets held by the tested foreign corporation during the tax year as passive assets if they “produce passive income or . . . are held for the production of passive income” (emphasis added). The most natural reading of “held for the production” is that the term refers to assets that can generate passive income while held but do not currently generate (or have not recently generated) passive income, or that are used (or are intended to be used) in an activity that generates passive income, or both. That is, the statutory language of section 1297(a)(2), by its own terms, characterizes assets as passive not only based on the passive income they currently produce (or have recently produced) but also, looking prospectively, to the income an asset may generate in the future while held by the tested foreign corporation.

The legislative history of section 1297(a)(2) supports this plain reading of the statute and also indicates that, in characterizing an asset for PFIC purposes, the statute takes into account the income such asset is expected to produce while held, primarily in cases in which there was no current income on which to characterize the asset. Specifically, the House Report to the Tax Reform Act of 1986, in discussing the characterization of stock for purposes of the PFIC Asset Test, stated that “stock paying no dividends currently but potentially able to pay dividends in the future is intended to be a passive asset” — that is, an asset characterized based on the character of the dividends paid (which generally would be passive outside the context of the Related-Person Look-Through Rule).10

Similarly, in describing the application of section 1297(b)(2)(C), the House and Senate reports to the Technical and Miscellaneous Revenue Act of 1988 (the “1988 Reports”) explained that “the characterization of the assets that generate the income will follow the characterization of the income so that, for example, a loan to a related person will be treated as a nonpassive asset if the interest on the loan is treated as nonpassive income.”11 The 1988 Reports also provided, in discussing the Related-Person Look-Through Rule, that “in the case of dividends, the committee intends that dividends be prorated between passive and nonpassive income on the basis of the passive and nonpassive earnings and profits of the payor.”12

Thus, the purpose and effect of the Related-Person Look-Through Rule is to characterize related-person income and assets by reference to the income of the related person. In this regard, the legislative history shows that, in characterizing an asset (e.g., stock or a note) under the PFIC Asset Test, the characterization is made by reference to the income such asset produces or is expected to produce while it is held (e.g., dividends or interest) such that it is irrelevant that gain from the sale of the asset generally would be treated as passive income (e.g., FPHCI from sale of stock or a note).13 The approach taken in the Final Regulations appears contrary to this legislative intent.14

Moreover, the PFIC Asset Test rules issued by the Service that were the only available guidance for over 30 years (i.e., Notice 88-22)15 also provided that the characterization of an asset should take into consideration the type of income the asset is intended to generate (and not be based only on the type of income it has recently generated or that would be generated on the disposition of the asset). More specifically, the ninth paragraph of Notice 88-22 provided that an asset will be treated as a passive asset if it “has generated (or is reasonably expected to generate in the reasonably foreseeable future) passive income as defined in section 129[7](b) in the hands of the foreign corporation” (emphasis added). In the preamble to the 2019 Proposed Regulations, the Treasury and the IRS confirmed that Notice 88-22 (and, thus, the “reasonably expected to generate in the reasonably foreseeable future” standard of its ninth paragraph) remained the applicable standard and that taxpayers could continue to rely on Notice 88-22 until such regulations were finalized. Although Treasury, in the preamble to the Final Regulations, has declared Notice 88-22, ninth paragraph, obsoleted, it did not express an intent to depart from the long-standing “reasonably expected to generate in the reasonably foreseeable future” standard contained therein for purposes of treating an asset as “held for the production of passive income,” as provided in section 1297(a)(2).

Notice 88-22 provided additional rules (which are also largely reflected in the Final Regulations) demonstrating that an asset generally should be characterized based only on the income it produces while held, rather than based on gains from its potential sale, except in the narrow case of dealer property.16 In this regard, Notice 88-22 provided that stock and securities that are inventory of a “regular dealer” are treated as held for sale to customers — and, thus, a nonpassive asset — notwithstanding that such stock or securities may generate passive dividend or interest income in the hands of the tested foreign corporation.17 The Final Regulations follow the same approach.18

ii. The Future Gain Rule could result in disparate treatment of similarly situated taxpayers and incentivize noneconomic behavior

As explained above, the Future Gain Rule can be viewed as conflicting with the statute, the legislative history, and the Service's long-standing guidance on the matter. In addition, the rule could produce arbitrary and unfair results that incentivize noneconomic behavior. As illustrated below, the desirability of avoiding the detrimental impact of such results should outweigh any concern with respect to the use of reasonable future income projections for purposes of characterizing Look-Through Stock — especially when data is available to support such projections (as discussed in more detail in section II.B.c below).

For example, suppose a tested foreign corporation (“ForCo”) owns, since Year 1, 30 percent of FSub, which owns 80 percent of the stock of OpCo I and 80 percent of the stock of OpCo II. Thus, OpCo I and OpCo II are related to FSub for purposes of applying the Related-Person Look-Through Rule to the stock of, and dividends paid by, OpCo I and OpCo II in the hands of ForCo under section 1297(c), as provided in Treas. Reg. § 1.1297-2(d).

OpCo I and OpCo II both generate nonpassive income from a similar type of operating businesses. In Year 3, OpCo I has current and accumulated earnings and profits (“E&P”) of $50M, 100 percent consisting of nonpassive earnings derived from nonpassive income, and OpCo II has current and accumulated E&P of $20M, 100 percent consisting of nonpassive earnings derived from nonpassive income. Suppose that OpCo I never has paid any dividends to FSub, while in Year 1, OpCo II paid a $100,000 dividend to FSub.

In this instance, in characterizing OpCo I's and OpCo II's stock in Year 3 for PFIC Asset Test purposes, because OpCo I has not paid dividends in more than two years, its stock in the hands of ForCo (under section 1297(c) through FSub) would be treated as a per se passive asset under the Final Regulations, despite the fact that OpCo I carries on an active business and has $50M of nonpassive E&P. OpCo II's stock would receive a different treatment under the Final Regulations and would be treated as a nonpassive asset simply because OpCo II paid a $100,000 dividend to FSub in Year 1.

There does not seem to be a compelling policy reason to provide different treatment to Look-Through Stock in two active corporations having the same profile of nonpassive income and E&P solely by reason of one of them having paid a dividend in the three-year window. In this respect, a company may not be in a position to distribute a dividend in a given taxable year for various reasons, including due to its tax attributes for the year (such as depreciation and amortization), expenses such as interest, and business considerations such as the need for cash for operations or investment for future growth in the business. Moreover, companies located in certain foreign jurisdictions may be subject to local retained earnings and other corporate law requirements that could cause a company to defer a dividend distribution for a given year even when such company has E&P under U.S. tax principles for such year.

In light of the foregoing considerations, it does not seem justifiable to apply a different (and more detrimental) treatment, for PFIC testing purposes, to stock of a foreign corporation that does not have the flexibility to pay dividends in a given year compared to that afforded to a company that pays dividends. In addition to potentially treating similarly situated taxpayers differently, the Future Gain Rule seems to encourage companies to engage in noneconomic behavior (such as distributing a small dividend notwithstanding the business needs of the distributing company) to change the characterization of Look-Through Stock for PFIC testing purposes. The example above illustrates how the Future Gain Rule potentially could distort the application of the Related-Person Look-Through Rule in the context of the PFIC Asset Test, in conflict with the policies of those rules.19

Therefore, we believe taxpayers should be able to characterize Look-Through Stock based on the character of the dividend income such stock is reasonably expected to generate in the reasonably foreseeable future. Accordingly, we recommend that, in finalizing the 2020 Proposed Regulations, Treasury and the Service reconsider the treatment under the Final Regulations (more specifically, by Treas. Reg. § 1.1297-1(d)(3)(iii)) of Look-Through Stock that does not pay dividends in the current year or within either of the prior two taxable years, and provide that such Look-Through Stock, for purposes of the PFIC Asset Test, should be characterized based on the character of the dividend income such stock is reasonably expected to generate in the reasonably foreseeable future while it is held by the tested foreign corporation.

c. Recommendation: Concerns about administrability or the speculative nature of characterizing future dividends could be mitigated through the adoption of safe harbors based on currently available information as well as a per se rule for cases in which a reasonable expectation of the character of future dividends cannot be established

As previously discussed, the preamble to the Final Regulations provides that “it would not be appropriate to allow stock to be treated as a non-passive asset on the basis of speculation that dividends might be received with respect to the stock and that such dividends could be non-passive under section 1297(b)(2)(C). . . .”20 While we acknowledge that Treasury and the IRS may have appropriate administrative concerns with respect to relying on projections, and understand the appeal of looking only to actual dividends within a small window of time, we believe that the characterization of Look-Through Stock based on the character of future dividend income is not an approach founded on mere speculation. Indeed, a taxpayer in a related-party context — i.e., a taxpayer investing in a corporation which it controls or with which it is commonly controlled by the same person (or persons)21 — is more likely to have a better understanding of the character of future income and earnings, as well as expected dividend payments, than an unrelated passive investor. Therefore, characterizing Look-Through Stock based on the character of the dividend income that such stock is reasonably expected to generate in the reasonably foreseeable future need not be a highly speculative or conjectural exercise.

In order to implement the recommendation above in a way that would provide clear and objective rules that would ensure certainty for taxpayers while addressing Treasury and the Service's administrability concerns, we recommend that Treasury and the Service allow taxpayers to use certain proxies (safe harbors) as predictors of reasonably expected future dividends and their corresponding character as passive or nonpassive income. Reasonable and administrable safe harbors could provide for the characterization of such Look-Through Stock based on the character (as passive or nonpassive) of:

(i) the current-year undistributed E&P; or

(ii) the current-year and accumulated undistributed E&P;22 or

(iii) in case the related person does not have either current-year or accumulated undistributed E&P, or where the related person's undistributed E&P are not reasonably ascertainable:

(a) the gross income from the current year, or

(b) the gross income from the current year and previous years.

Looking to the character of gross income, for example, for purposes of characterizing Look-Through Stock would effectively address the issue identified by Treasury and the Service in the preamble to the Final Regulations that “foreign corporations that are not CFCs may not maintain E&P based on U.S. tax principles.”23 Indeed, foreign corporations that are not CFCs, although carrying on businesses that generate nonpassive income, may not track E&P under U.S. tax standards as they generally would have no reason to do so, and requiring such E&P computations could be unduly burdensome, at least in years in which there are no distributions.24 Moreover, characterization of Look-Through Stock based on the nature of the related person's gross income also would better align with other rules that apply for purposes of the Related-Person Look-Through Rule, such as the treatment afforded to a partnership interest that is a related person to the tested foreign corporation, which is treated, for purposes of section 1297(b)(2)(C), as producing passive or nonpassive income in proportion to the tested foreign corporation's distributive share of partnership passive or nonpassive income for the taxable year under Treas. Reg. § 1.1297-1(c)(4)(vii).25

For purposes of determining the amount of accumulated undistributed E&P or gross income from previous years that would be taken into account in applying the safe harbors above, Treasury and the Service could follow the same alternative approaches set forth in Treas. Reg. § 1.1297-1(c)(4)(iv)(C) that apply, for purposes of the PFIC Income Test, in the allocation of dividend income paid with respect to Look-Through Stock to the related person's accumulated E&P.26 Accordingly, under these alternative approaches, taxpayers would be allowed to characterize Look-Through Stock that does not generate dividend income in the current year or within either of the prior two taxable years based on the ratio of passive to nonpassive accumulated undistributed E&P or passive to nonpassive gross income from previous years (i) ratably for the entire period during which the related person was related to the recipient (i.e., the related-party period), or (ii) if the related person has been related to the recipient for more than three years, ratably for the three-year period immediately preceding the related person's tax year that ends with or within the current tax year of the recipient (i.e., the three-year period).27

If none of the safe harbors are relied upon by taxpayers, they would be expected to have the burden of otherwise establishing that the Look-Through Stock held by the relevant tested foreign corporation is reasonably expected to pay (nonpassive) dividends in the reasonably foreseeable future during the holding period of the tested foreign corporation. Inability to establish, based on the safe harbors or any other reasonable standard, that the Look-Through Stock is reasonably expected to pay nonpassive dividends in the reasonably foreseeable future could be resolved by treating such stock as being held for the production of only passive dividend income, thus resulting in its characterization as a passive asset.28

We greatly appreciate the opportunity to provide these comments and your attention to them. Should you have any questions, please do not hesitate to contact Charles Markham at (202) 841-9355, Kelvin Hsu at (347) 276-9986, or Ethan Atticks at (202) 805-8857.

Very truly yours,

PricewaterhouseCoopers, LLP

FOOTNOTES

1Unless otherwise indicated, all “section” references are to the Internal Revenue Code of 1986, as amended, and all “Treas. Reg. §” and “Prop. Treas. Reg. §” references are to the final and proposed Treasury regulations, respectively, promulgated thereunder as in effect as of the date of this letter.

2REG-105474-18, 84 Fed. Reg. 33120 (July 11, 2019).

3Treas. Reg. § 1.1297-1(d)(3)(i).

4Treas. Reg. § 1.1297-1(d)(3)(iii).

5Id.

6Prop. Treas. Reg. § 1.1297-1(d)(2)(iii).

7See 86 Fed. Reg. 4525 (Jan. 15, 2021).

8Id.

9As further discussed in this letter, an asset's characterization based on the nature of gain upon its disposition would only apply, as an exception to the general rule, in the narrow case in which such asset is primarily held for sale (which is not the case of Look-Through Stock). See Notice 88-22, 1988-1 CB 489 (Feb. 26, 1988), paragraphs fourteenth through sixteenth (concerning dealer inventory and investment assets for purposes of the PFIC Asset Test).

10H.R. Rep. No. 99-426 (1985) at 366. It is important to note that this statement refers to stock in general — which generally is treated as passive absent an exception applying, such as the Related-Person Look-Through Rule (or the subsidiary look-through rule of section 1297(c)) — and, therefore, does not suggest that all stock should be treated as a passive asset. Instead, this language provides that stock generally is treated as a dividend-producing asset and thus should be characterized based on the dividends the stock is expected to produce.

11H.R. Rep. No. 100-795 (1988), at 268, 272; S. Rep. No. 100-445 (1988), at 238, 285.

12Id.

13See section 954(c)(1)(B)(i), providing that gain from the sale of property giving rise to interest or dividends is foreign personal holding company income (“FPHCI”) without regard to whether the property gives rise to interest or dividends described in section 954(c)(3)(A)(i), which excludes from FPHCI certain interest or dividends received from a related corporation.

14See Treas. Reg. § 1.1297-1(d)(3)(iii). As reasoned by Treasury in the preamble to the Final Regulations, “[i]f, however, the stock has not recently generated dividends, it is more appropriate to treat the stock as held for the production of gains upon disposition, which would generally be passive income.”

15Furthermore, the Service has relied upon Notice 88-22 in applying the PFIC Asset Test on several occasions over the years. See PLR 200813036 (2008 WL 825637), TAM 200212001 (2002 WL 442901), FSA 2002 WL 1315676, FSA 200104019 (2001 WL 63263), PLR 9643011 (1996 WL 616059), PLR 9238019 (1992 WL 232444).

16See Notice 88-22, paragraphs fourteenth through sixteenth (concerning dealer inventory and investment assets for purposes of the PFIC Asset Test), which have been declared obsoleted in the preamble to the Final Regulations.

17Notice 88-22 also provided a rule in its ninth paragraph for dual-character property that further supports the view that an asset should be characterized based on the income it produces while held. Such rule was incorporated by the Final Regulations, which provide that “[t]he value (or adjusted basis) of the dual-character asset [i.e., an asset (or portion of an asset) that produces both passive income and non-passive income during a taxable year] is allocated between the passive asset and the non-passive asset in proportion to the relative amounts of passive income and non-passive income produced by the asset (or portion of an asset) during the taxable year.” See Treas. Reg. § 1.1297-1(d)(3)(i). The focus on income produced during the year suggests a presumption that assets generally are characterized based on income produced while held and not on the nature of gain upon their possible future disposition.

18Treas. Reg. § 1.1297-1(d)(5).

19In addition, the rules in the Final Regulations, as currently written, subject tested foreign corporations that own start-up companies to a greater risk of PFIC exposure. Suppose a tested foreign corporation holds Look-Through Stock in an operating company during its start-up phase (during which it may not have E&P and, thus, the capacity to pay dividends). Even if the start-up company is carrying on an active business that generates nonpassive income and, thus, was not created to shield investment income, the tested foreign corporation could be treated as holding a passive asset.

2086 Fed. Reg. 4525 (Jan. 15, 2021).

21For these purposes, “control” means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. See sections 1297(b)(2)(C) and 954(d)(3).

22Looking to the character of current-year and accumulated E&P for purposes of characterizing Look-Through Stock under the PFIC Asset Test is consistent with the treatment afforded by the Final Regulations for the characterization of dividend income paid with respect to Look-Through Stock for purposes of the PFIC Income Test. See Treas. Reg. § 1.1297-1(c)(4)(iv).

2386 Fed. Reg. 4522 (January 15, 2021).

24Treasury and the IRS have already expressed their concern with the imposition of unnecessary burdens on taxpayers for PFIC testing purposes and to address this concern have issued new rules aiming at minimizing such burdens — see, e.g., the new rule in the 2020 Proposed Regulations (Prop. Treas. Reg. § 1.1297-1(d)(1)(v)(D)) allowing the use of financial statements for asset valuation purposes.

25Looking to the character of gross income for purposes of characterizing Look-Through Stock also is consistent with Treas. Reg. § 1.1297-1(c)(4)(iv), which allows taxpayers to allocate the related person's E&P in proportion to the ratio of the related person's passive gross income to nonpassive gross income for the relevant period (current taxable year for dividends paid out of current E&P or previous years for dividends paid out of accumulated E&P). Also, that approach is consistent with the application of the Related-Person Look-Through Rule with respect to interest and debt, which looks to the character of the gross income of the obligor in characterizing interest payments (see section 1297(b)(2)(C), Treas. Reg. § 1.1297-1(c)(4)(iii), and Treas. Reg. § 1.904-5(c)(2)).

26Under the Final Regulations, dividends paid with respect to Look-Through Stock first are treated as coming out of current-year E&P and then out of accumulated E&P (either because there is no current E&P or because the amount of the dividends exceeds the current E&P). See Treas. Reg. § 1.1297-1(c)(4)(iv)(A) and (B). For purposes of allocating dividends paid out of accumulated E&P, the Final Regulations allow taxpayers to characterize such dividends based on the ratio of passive to nonpassive accumulated E&P (i) for the years to which they are allocated (beginning with the most recently accumulated) (the “default approach”); or (ii) ratably for the entire period during which the related person was related to the recipient (the “related party period”); or (iii) if the related person has been related to the recipient for more than three years, ratably for the three-year period immediately preceding the related person's tax year that ends with or within the current tax year of the recipient (the “three-year period”). See Treas. Reg. § 1.1297-1(c)(4)(iv)(C).

27Id.

28The treatment of Look-Through Stock as generating passive dividend income in case the taxpayer is not able to establish the reasonableness of its expectation that such stock will produce nonpassive income in the reasonably foreseeable future is consistent with one of the alternatives provided in the Final Regulations for purposes of allocating interest income under the Related-Person Look-Through Rule when the related person does not have gross income for a given taxable year. See Treas. Reg. § 1.1297-1(c)(4)(iii).

END FOOTNOTES

DOCUMENT ATTRIBUTES
Copy RID