§1293 Current taxation of income from qualified electing funds

Summary

United States persons who own stock in a qualified electing fund must include each year their share of the fund’s earnings in their own taxable income. They must report their pro rata share of the fund’s ordinary earnings as ordinary income and their pro rata share of the fund’s net capital gain as long-term capital gain. The amount is reported in the shareholder’s tax year that ends with the fund’s tax year. "Pro rata share" means what you would have received if the fund paid out each day a fair daily share of that day’s earnings and gains. A fund can use a shorter period to measure shares if the Secretary accepts it. If a payment from the fund was already included in a United States person’s income under these rules, that payment is treated as a non-dividend distribution and reduces the fund’s earnings and profits. That special rule does not apply to U.S. shareholders of a controlled foreign corporation, and different rules under sections 951 and 959 then apply. A shareholder’s stock basis is increased by amounts included under these rules and reduced by non‑taxable distributions under these rules. "Ordinary earnings" means the fund’s earnings and profits minus its net capital gain, and net capital gain cannot be more than earnings and profits. For tax-credit purposes, amounts included here are treated like amounts included under section 951; amounts excluded under the non‑dividend rule are treated like amounts excluded under section 959. Income already taxed abroad at an effective rate greater than 90 percent of the maximum rate in section 11, or U.S.-source income that is effectively connected and not treaty‑exempt, may be excluded if the shareholder proves it. The tax official will make any needed adjustments to avoid taxing the same income twice.