Active Banking and Insurance Income Exclusion

§ 1297. Passive foreign investment company(a) In generalFor purposes of this part, except as otherwise provided in this subpart, the term “passive foreign investment company” means any foreign corporation if—(1) 75 percent or more of the gross income of such corporation for the taxable year is passive income, or (2) the average percentage of assets (as determined in accordance with subsection (e)) held by such corporation during the taxable year which produce passive income or which are held for the production of passive income is at least 50 percent. (b) Passive incomeFor purposes of this section—(1) In generalExcept as provided in paragraph (2), the term “passive income” means any income which is of a kind which would be foreign personal holding company income as defined in section 954(c). (2) ExceptionsExcept as provided in regulations, the term “passive income” does not include any income—(A) derived in the active conduct of a banking business by an institution licensed to do business as a bank in the United States (or, to the extent provided in regulations, by any other corporation), (B) derived in the active conduct of an insurance business by a qualifying insurance corporation (as defined in subsection (f)), (C) which is interest, a dividend, or a rent or royalty, which is received or accrued from a related person (within the meaning of section 954(d)(3)) to the extent such amount is properly allocable (under regulations prescribed by the Secretary) to income of such related person which is not passive income, or (D) which is export trade income of an export trade corporation (as defined in section 971). For purposes of subparagraph (C), the term “related person” has the meaning given such term by section 954(d)(3) determined by substituting “foreign corporation” for “controlled foreign corporation” each place it appears in section 954(d)(3). (c) Look-thru in the case of 25-percent owned corporationsIf a foreign corporation owns (directly or indirectly) at least 25 percent (by value) of the stock of another corporation, for purposes of determining whether such foreign corporation is a passive foreign investment company, such foreign corporation shall be treated as if it—(1) held its proportionate share of the assets of such other corporation, and (2) received directly its proportionate share of the income of such other corporation. (d) Exception for United States shareholders of controlled foreign corporations(1) In generalFor purposes of this part, a corporation shall not be treated with respect to a shareholder as a passive foreign investment company during the qualified portion of such shareholder’s holding period with respect to stock in such corporation. (2) Qualified portionFor purposes of this subsection, the term “qualified portion” means the portion of the shareholder’s holding period—(A) which is after December 31, 1997, and