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Under(sec) 1296, a foreign corporation is a passive foreign investment company ("PFIC") if (1) 75% or more of the gross income of the corporation for the taxable year is passive income, or (2) the average percentage of assets (by value) held by such corporation during the taxable year which produce passive income or which are held for the product on passive income is at least 50%. Under (sec) 1291, U.S. persons who are direct or indirect shareholders of PFICs are subject to a special tax on the undistributed earnings of PFICs or, alternatively, an interest charge for certain distributions made by the PFIC and upon disposition of their PFIC stock. In addition, beneficiaries who inherit PFIC stock generally are denied a step- up in basis with respect to that stock that otherwise would be permitted under (sec)1014. (sec)1291(e).
PLR 199939038 illustrates how a PFIC shareholder who makes certain elections with respect to his or her PFIC stock may "purge" the PFIC taint and, notwithstanding the general rule of (sec)1291 (e), secure a step-up in basis for the stock on his or her death.
In PLR 199939038, the taxpayer ("Taxpayer") owned controlling interests in the stock of two corporations, the only activities of which were passive investment activities. Both corporations had been PFICs since the PFIC rules became effective on January 1, 1987. They were also "controlled foreign corporations" (CFCs) for purposes of subpart F of the Code. Effective for taxable years 1996 and 1997, Taxpayer elected...