# Prop. Treas. Reg. § 1.1293-2: Special Inclusion Rules for Special Preferred QEF Election. Proposed regulation, not in force. REG-209040-88, 61 FR 67752, published 1996-12-24 . Interprets 26 U.S.C. § 1293. Par. 2. Section 1.1293-2 is added to read as follows: (a) In general. A shareholder (including a shareholder that is a pass-through entity, as described in Sec. 1.1295-2(c)(1)) that makes a special preferred QEF election under Sec. 1.1295-2 must, regardless of the shareholder's method of accounting, include in income in respect of each share subject to the election, an annual amount (preferred QEF amount) determined according to the rules of paragraph (b) of this section. A shareholder that makes a special preferred QEF election must include the preferred QEF amount in income under this section for each year in which the taxpayer continues to hold a share that is subject to the election. The rules of this section apply in lieu of the general rules of section 1293 and Sec. 1.1293-1.\1\ --------------------------------------------------------------------------- \1\ This proposed regulation was published on April 1, 1992, at 57 FR 11024. --------------------------------------------------------------------------- (b) Preferred QEF amount--(1) In general. The preferred QEF amount for any share subject to a special preferred QEF election is the sum of the ratable daily portion of each periodic dividend amount (as described in paragraph (b)(2) of this section) on the share for the taxable year of the shareholder to which that portion relates, plus the preferred discount amount (as defined below), if any, for the taxable year. For purposes of this section, the preferred discount amount for a taxable year is the amount that bears the same ratio to the total amount of preferred discount (as described in Sec. 1.1295-2(b)(2)(i)) on the share as the number of days that the taxpayer held the share in the taxable [[Page 67756]] year bears to the number of days after the date the taxpayer acquired the share and up to (and including) the share's redemption date as established under the principles of Sec. 1.305-5(b). Notwithstanding the preceding sentence, the preferred discount amount for a taxable year is zero if the preferred discount on the share at the time of its acquisition by the shareholder was less than an amount equal to \1/4\ of 1 percent of the redemption price of the stock, multiplied by the number of complete years from the date of acquisition of the stock to the redemption date of the stock. (2) Periodic dividend amount. A periodic dividend amount is the amount payable with respect to a share, whether on a cumulative or noncumulative basis, for a period (wholly or partly within the shareholder's taxable year) for which dividends on the share are calculated based upon the redemption or liquidation price of the share multiplied by a fixed percentage rate. (c) Special rules of application--(1) Earnings and profits disregarded. The amounts to be included in income pursuant to this section are determined without regard to the earnings and profits of the foreign corporation with respect to which the special preferred QEF election applies. (2) Year of inclusion. The shareholder includes the preferred QEF amount in its taxable year without regard to the taxable year of the foreign corporation with respect to which the special preferred QEF election applies. (3) Character of inclusions. The shareholder includes all preferred QEF amounts in income as ordinary earnings. (4) Treatment of distributions. Distributions received by a shareholder on shares subject to a special preferred QEF election that are paid out of earnings and profits of the foreign corporation are not included in gross income of the shareholder to the extent the distributions do not exceed the preferred QEF amounts (other than any portion of preferred QEF amounts consisting of preferred discount amounts) previously includible in income pursuant to this section. These distributions will, however, be treated as dividends for all other purposes of the Code and regulations. Amounts distributed to a shareholder with respect to shares subject to a special preferred QEF election that exceed amounts previously included in income under this section with respect to such shares are treated for all purposes of the Code and regulations as a distribution of property subject to the rules of section 301. (5) Basis adjustment rules. The adjusted basis of a shareholder in shares that are subject to a special preferred QEF election shall be-- (i) Increased by any amount that is included in the gross income of the shareholder under paragraph (a) of this section; and (ii) Decreased by any dividends (not to exceed the amount included in gross income under paragraph (a) of this section) actually paid to the shareholder in respect of such shares. (6) Effect limited to electing shareholder. This section does not apply to the foreign corporation with respect to which a special preferred QEF election applies. Accordingly, the provisions of this section will not affect the foreign corporation's calculation of its earnings and profits for any purpose of the Code or regulations. In addition, the rules of this section apply only for purposes of determining the tax consequences for holders of shares subject to the election. Thus, the election shall have no effect on the application of the Code or regulations with respect to the tax consequences of the ownership of shares that are not subject to the election, including for purposes of determining whether any distributions from the foreign corporation with respect to such shares should be treated as having been included in the income of any United States person pursuant to section 1293(c) or section 959. (d) Examples. The following examples illustrate the rules of paragraphs (a), (b) and (c) of this section. Although these examples assume a 30-day month, 360-day year, any reasonable counting method may be used to compute the length of accrual periods. For purposes of simplicity, the relevant amounts as stated are rounded to two decimal places. However, the computations do not reflect any such rounding convention. The examples are as follows: Example 1. Preferred QEF amount--(i) Facts. (A) On May 1, 1998, A, an individual who files his returns on a calendar year basis, purchased for $10,000 in a single secondary market transaction 100 shares of nonconvertible Class A $100 par value preferred stock (the Class A Stock) of FC, a foreign corporation with a taxable year ending on March 31. (B) The terms of the Class A Stock provide for a mandatory redemption of the Class A Stock by the issuer at par on June 1,