RS ADVISES TAXPAYER ON VERIFYING PROPER PFIC REPORTING

Posted by Kim Chen on October 17th, 2018

Information Letter 2018-0028
In an Information Letter, IRS has advised a taxpayer, who sold his interest in a passive foreign investment company (PFIC), on the steps he can take to verify that he properly reported his PFIC transaction and, presumably, determine whether he is due a refund.
Background. A PFIC is any foreign corporation if:
1. At least 75% of its gross income for its tax year is passive, or
2. At least 50% of the assets it held during the year produce passive income or are held for the production of passive income. (Code Sec. 1297(a))
The passive assets test is generally applied based on the fair market value (FMV) of the corporation’s assets, but assets are valued based on their adjusted basis where the corporation isn’t publicly traded and either is a controlled foreign corporation or elects to use the adjusted basis instead of FMV. (Code Sec. 1297(e))
How a PFIC’s U.S. shareholder is taxed depends on whether the shareholder has made a qualifying electing fund (QEF) election, a mark-to-market election, or has not made any election.
Facts. A taxpayer, who sold his interest in a PFIC, contacted IRS and inquired as to whether he could recover the amount he paid to IRS because of this PFIC transaction.
IRS guidance. In Information Letter 2018-0028, IRS advised a taxpayer that he should take the following steps to verify that he properly reported his PFIC transaction:

1. Determine the portion, if any, of the gain that was attributable to years in which the investment was not considered a PFIC. Based on available information, IRS stated that this amount would be the portion of the gain attributable to the period from the date of purchase until the taxpayer became a U.S. resident for U.S. tax purposes.
2. If the investment was held in a retirement account, then the taxpayer should consult the applicable U.S. income tax treaty to determine if there are income tax treaty provisions that apply to the investment. IRS noted that the income tax treaty can be found at its website.
3. If either of the above first two steps results in a change in the way the taxpayer reported the transaction on his tax return, he should complete and file an amended return (Form 1040X, Amended U.S. Individual Income Tax Return) to claim a refund.
In addition, IRS advised the taxpayer that, with regard to his question on the PFIC Annual Information Statements (described in Reg § 1.1295-1(g)(1)), PFICs were not required to issue this statement annually.
A shareholder makes a QEF election by attaching Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) to its federal income tax return filed by the election due date for the shareholder’s election year. The shareholder must also receive and reflect in Form 8621 the information provided in the PFIC Annual information Statement, the Annual Intermediary Statement, or the applicable combined statement for the tax year of the PFIC ending with or within the tax year for which Form 8621 is being filed.
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