post-1986 earnings and profits
(2) Election to recognize gain where company becomes qualified electing fund (A) In general If— (i) a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986 , (ii) the taxpayer holds stock in such company on the first day of such taxable year, and (iii) the taxpayer establishes to the satisfaction of the Secretary the fair market value of such stock on such first day, the taxpayer may elect to recognize gain as if he sold such stock on such first day for such fair market value. (B) Additional election for shareholder of controlled foreign corporations (i) In general If— (I) a passive foreign investment company becomes a qualified electing fund with respect to the taxpayer for a taxable year which begins after December 31, 1986 , (II) the taxpayer holds stock in such company on the first day of such taxable year, and (III) such company is a controlled foreign corporation (as defined in section 957(a) ), the taxpayer may elect to include in gross income as a dividend received on such first day an amount equal to the portion of the post-1986 earnings and profits of such company attributable (under regulations prescribed by the Secretary) to the stock in such company held by the taxpayer on such first day. The amount treated as a dividend under the preceding sentence shall be treated as an excess distribution and shall be allocated under subsection (a)(1)(A) only to days during periods taken into account in determining the post-1986 earnings and profits so attributable. (ii) Post-1986 earnings and profits For purposes of clause (i), the term “post-1986 earnings and profits” means earnings and profits which were accumulated in taxable years of such company beginning after December 31, 1986 , and during the period or periods the stock was held by the taxpayer while the company was a passive foreign investment company. (iii) Coordination with section 959(e) For purposes of section 959(e), any amount included in gross income under this subparagraph shall be treated as included in gross income under section 1248(a). (C) Adjustments In the case of any stock to which subparagraph (A) or (B) applies— (i) the adjusted basis of such stock shall be increased by the gain recognized under subparagraph (A) or the amount treated as a dividend under subparagraph (B), as the case may be, and (ii) the taxpayer’s holding period in such stock shall be treated as beginning on the first day referred to in such subparagraph.