Passive Foreign Investment Company (PFIC)

[Debbie Campbell]

Client received distributions in 06 and 07 from Overseas Partners, Ltd.
(a PFIC). 06 did not file form 8621 to elect to treat it as a PFIC.
My understanding is the election was due by extension date for 06 but
can still elect for 07. I understand that can request IRS to give retroactive election if client relied on CPA. (don't want to take the fall
for this as client insisted file distribution as LTCG as didn't want to go on extension and info to file election was not available by 4/15/07).

I believe without the election the corp. is a section 1291 fund. This
means distribution is treated as excess distributions. Based on calc. in
section IV form 8621 there does not appear to be excess distribution.
so now the current year distribution is taxed as ordinary dividend subj.
to ordinary income tax rates??? Form 8621 refers to code section
301(c)(1): Amount beyond basis is treated as gain from sale. However, gains from disposition of section 1291 fund are treated as excess distributions, which are still taxed at ordinary income rates. I keep coming back to the current distribution being subject to ordinary
income tax rates? Is this correct treatment? Any suggestions?

Debbie

[travis bickle]

debbie, i am replying to your original question

Client received distributions in 06 and 07 from Overseas Partners, Ltd.
(a PFIC). 06 did not file form 8621 to elect to treat it as a PFIC.
My understanding is the election was due by extension date for 06 but
can still elect for 07. I understand that can request IRS to give retroactive election if client relied on CPA. (don't want to take the fall
for this as client insisted file distribution as LTCG as didn't want to go on extension and info to file election was not available by 4/15/07).

I believe without the election the corp. is a section 1291 fund. This
means distribution is treated as excess distributions. Based on calc. in
section IV form 8621 there does not appear to be excess distribution.
so now the current year distribution is taxed as ordinary dividend subj.
to ordinary income tax rates??? Form 8621 refers to code section
301(c)(1): Amount beyond basis is treated as gain from sale. However, gains from disposition of section 1291 fund are treated as excess distributions, which are still taxed at ordinary income rates. I keep coming back to the current distribution being subject to ordinary
income tax rates? Is this correct treatment? Any suggestions?

Debbie

in order to bump it back to the top just in case there are folks more knowledgable in this area who are willing to give it a go.

in your second question, i believe you misstated yourself slightly so i want to address that. the taxpayer does not "elect" to treat a foreign company as a PFIC. a PFIC exist, by IRS definition when "a PFIC occurs when 75% or more of the company's income is passive, or when more than 50% of the company's assets exist in investments earning interest, dividends, and/or capital gains."

the only election a taxpayer has when investing in a PFIC is to treat it as a QEF.

finally, to answer your last question above -- yes. again, according to the service, the gain is taxed "at the highest rate" which means "ordinary income" as opposed to "capital gains rate. your analysis of what is going on concurs with mine -- i had my first client with a PFIC come into the office a few days ago, and i have been burning the midnight oil to understand this situation; unfortunately for your client you are right.

be sure to understand one thing -- a separate 8621 is required for each PFIC [if my analysis is correct].

and, i have one question for you. are you sure about the filing parameters? i thought the form 8621 was due by the due date of the return, including extensions.

thanks for the challenge,
travis

[Debbie Campbell]

Thanks so much for your reply, and yes I was referring to electing
QEF status for the PFIC. So now it will be treated as a 1291 fund
with ordinary tax rates. The election is due by extension date. I'm good for 2007 its the 2006 year that I too late to elect QEF status.

Debbie

[travis bickle]

yeah

Thanks so much for your reply, and yes I was referring to electing
QEF status for the PFIC. So now it will be treated as a 1291 fund
with ordinary tax rates. The election is due by extension date. I'm good for 2007 its the 2006 year that I too late to elect QEF status.

Debbie

unfortunately for your client -- tell him to find a U.S. concern to put his money in.
of course, that may be a problem with all the financial rigamarole going on.

good luck debbie