Facts: Client holds investment in Co. classified as PFIC starting for
2006. Did not make QEF election in 06 but plan to for 07 (final year).
Have filed all gains totalling $ 122,000 as LTCG on 2003-2006 tax returns.
Conclusions: Must file 8621 and if not electing QEF then treat as a
Section 1291 Fund (this would be the case if amended 06 return).
Section 1291 Fund fills in part IV: figures income allocated to each holding period year (1998 - 2006) for pre-PFIC years and current year. The result is $122,000 goes on 1040/line 21 as other income. Yet it has already been taxed as LTCG. This is double taxation! Then you have to pay interest back to 1998 as if the income was received in that year but not reported. This appears to be a major penalty for not electing QEF in the first year (2006). For years other than the current year that the company was a PFIC you simply figure the additional tax between ordinary rates and LTCG. This makes sense but I don't have any of those years.
DO I UNDERSTAND THIS CORRECTLY? THIS IS BEAT!!!
ANY WAY AROUND THIS. I DON'T THINK ANY OF THE OTHER
ELECTIONS ARE APPLICABLE? Of course this only matters if the
client is willing to amend the 06 return. For 07 I guess I elect QEF status and include the prorata share of ordinary and LTCG in income
and then I get to include the distribution as a LTCG.
2006. Did not make QEF election in 06 but plan to for 07 (final year).
Have filed all gains totalling $ 122,000 as LTCG on 2003-2006 tax returns.
Conclusions: Must file 8621 and if not electing QEF then treat as a
Section 1291 Fund (this would be the case if amended 06 return).
Section 1291 Fund fills in part IV: figures income allocated to each holding period year (1998 - 2006) for pre-PFIC years and current year. The result is $122,000 goes on 1040/line 21 as other income. Yet it has already been taxed as LTCG. This is double taxation! Then you have to pay interest back to 1998 as if the income was received in that year but not reported. This appears to be a major penalty for not electing QEF in the first year (2006). For years other than the current year that the company was a PFIC you simply figure the additional tax between ordinary rates and LTCG. This makes sense but I don't have any of those years.
DO I UNDERSTAND THIS CORRECTLY? THIS IS BEAT!!!
ANY WAY AROUND THIS. I DON'T THINK ANY OF THE OTHER
ELECTIONS ARE APPLICABLE? Of course this only matters if the
client is willing to amend the 06 return. For 07 I guess I elect QEF status and include the prorata share of ordinary and LTCG in income
and then I get to include the distribution as a LTCG.