QEF Capital Gains Pass-Through

§ 1293. Current taxation of income from qualified electing funds(a) Inclusion(1) In generalEvery United States person who owns (or is treated under section 1298(a) as owning) stock of a qualified electing fund at any time during the taxable year of such fund shall include in gross income—(A) as ordinary income, such shareholder’s pro rata share of the ordinary earnings of such fund for such year, and (B) as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such year. (2) Year of inclusionThe inclusion under paragraph (1) shall be for the taxable year of the shareholder in which or with which the taxable year of the fund ends. (b) Pro rata shareThe pro rata share referred to in subsection (a) in the case of any shareholder is the amount which would have been distributed with respect to the shareholder’s stock if, on each day during the taxable year of the fund, the fund had distributed to each shareholder a pro rata share of that day’s ratable share of the fund’s ordinary earnings and net capital gain for such year. To the extent provided in regulations, if the fund establishes to the satisfaction of the Secretary that it uses a shorter period than the taxable year to determine shareholders’ interests in the earnings of such fund, pro rata shares may be determined by using such shorter period. (c) Previously taxed amounts distributed tax freeIf the taxpayer establishes to the satisfaction of the Secretary that any amount distributed by a passive foreign investment company is paid out of earnings and profits of the company which were included under subsection (a) in the income of any United States person, such amount shall be treated, for purposes of this chapter, as a distribution which is not a dividend; except that such distribution shall immediately reduce earnings and profits. If the passive foreign investment company is a controlled foreign corporation (as defined in section 957(a)), the preceding sentence shall not apply to any United States shareholder (as defined in section 951(b)) in such corporation, and, in applying section 959 to any such shareholder, any inclusion under this section shall be treated as an inclusion under section 951(a)(1)(A). (d) Basis adjustmentsThe basis of the taxpayer’s stock in a passive foreign investment company shall be—(1) increased by any amount which is included in the income of the taxpayer under subsection (a) with respect to such stock, and (2) decreased by any amount distributed with respect to such stock which is not includible in the income of the taxpayer by reason of subsection (c). A similar rule shall apply also in the case of any property if by reason of holding such property the taxpayer is treated under section 1298(a) as owning stock in a qualified electing fund.