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INTRODUCTION
The (IRS) has a penchant for issuing passive foreign investment company (PFIC) regulations 1 around holidays and other festive dates. April Fool's Day 1992 gave us "pedigreed" and "unpedigreed" versions of qualified electing funds (QEFs) as part of the complex and detailed proposed regulations on sec 1291,2 an invitation to canine metaphor entirely appropriate to the occasion. On Christmas Eve 1996, Santa paid a visit to the Federal Register with a stocking stuffer in the form of proposed regulations on the special rules governing QEF treatment of preferred stock of PFICs, much to the delight of those pondering such mysteries.3
After Congress made major changes to the PFIC rules in the Taxpayer Relief Act of 1997 (TRA 1997),4 the year would not have been complete without a riposte by the IRS on the PFIC regulatory front. So it was not surprising that, as the strains of Auld Lang Syne drifted from car radios as they journeyed homeward to celebrate New Year's Eve 1998, the Old Year deposited a PFIC gift for the New Year with the Federal Register: long-awaited, generally taxpayer beneficial, temporary regulations with guidance on making QEF elections, not only for the future, but retroactively and protectively.5 The retroactive and protective QEF election provisions were themselves made applicable to prior open years generally, as if the IRS, like Marley, sought to help taxpayers deal with the ghost of PFICs past. The IRS even threw in the towel where small shareholders in certain PFICs were concerned, by giving them an almost unrestricted "pass" to retroactive pedigreed QEF status.6
Bearing even more gifts for taxpayers, the new regulations picked up a cue from the legislative history of the TRA 1997 to alleviate significantly a major trap for the unwary contained in the otherwise beneficial repeal of the PFIC/CFC overlap.' Other issues surrounding QEF elections were clarified by the new regulations, including the effects of termination, revocation, or invalidation of a QEF election, the continued efficacy of a QEF election where the foreign corporation ceases to be a PFIC, and the availability of QEF elections with respect to options on the stock of a PFIC. Moreover, the compliance requirements in connection with a QEF election were simplified.
RETROACTIVE QEF ELECTIONS
Overview
A QEF election...