PFIC Regulations Impact 2013 Filers

This is an updated version of this article; the original version misstated the effective date of the regulations.

On December 30, 2013, the IRS released temporary regulations related to annual filing requirements for Passive Foreign Investment Company (“PFIC”) shareholders and provided guidance on determining the ownership of a PFIC.  The regulations also provided an exclusion for shareholders that constructively own interests in certain foreign corporations.  (See T.D. 9650 effective December 31, 2013.)

One of the key provisions of the temporary regulations is to effectuate the requirement of certain U.S. persons having to file annual reports for PFICs on Form 8621. as provided by Internal Revenue Code (“IRC”) section 1298(f), added by the Hiring Incentives to Restore Employment Act of 2010 (“HIRE Act”). The filing under the regulations is applicable for tax years ending on or after December 31, 2013 and applies to the 2013 tax filings for individuals and entities with calendar tax years.

The regulations do not specify any monetary penalty for failing to file Form 8621 under IRC section 1298(f); but under IRC section 6501(c)(8), the period of limitation for assessment of tax with respect to periods for which reporting is required will generally remain open for three years after the date on which the IRS receives the Form 8621 for the taxable year

Filing Requirements

A U.S. shareholder of a PFIC must file an annual report unless the Treasury secretary granted an exception under Internal Revenue Code Section 1298(f). The temporary regulations eliminated the caveat in Notice 2011-35 that persons with a reporting obligation that would have commenced in 2010 would have to file retroactively.

The regulations eliminated duplicative reporting and now require shareholders and indirect shareholders who are at the lowest tier of a chain of companies to file the Form 8621.  Ownership of PFIC stock through another U.S. person also triggers reporting in specific instances. Duplicative reporting is eliminated for those U.S. persons who are required to include an amount in income under the Qualified Electing Fund (“QEF”) or Mark-to-Market (“MTM”) regimes for PFIC stock held through other U.S. persons if another shareholder through which the U.S. person holds the PFIC stock timely files the Form 8621.

The filing requirements apply to domestic estates, non-grantor trusts, and U.S. owners of domestic or foreign grantor trusts that own PFIC stock, but do not apply to a U.S. person who is treated as the owner of any portion of a foreign grantor trust that is a foreign pension fund that provides pension or retirement benefits, if, pursuant to an income tax treaty, income earned by the pension fund is taxed as income of the U,S, person only when it is paid to or for the benefit of a U,S, person.

An exception from filing is provided for a U.S. person who is the owner of part of a domestic liquidating trust created under a bankruptcy proceeding and any portion of a domestic widely held fixed investment trust.

U.S. persons that are beneficiaries of foreign estates and foreign trusts that have made QEF or MTM elections with respect to PFIC stock held by the estate or trust are required to file an annual report under the regulations.  Those U.S. beneficiaries that have not made the elections and are not treated as receiving an excess distribution or as recognizing gain treated as an excess distribution do not have a filing obligation.

U.S. persons that are beneficiaries of domestic estates or non grantor trusts generally are required to file the Form 8621 under the regulations with respect to the PFIC only if the estate or trust (and any other U.S. person in chain of ownership) fails to file an annual report.  U.S. beneficiaries are required to report in any case in which the beneficiary is treated as receiving an excess distribution or recognizes gains treated as an excess distribution.

Tax exempt organizations that own an interest in a PFIC who are not subject to tax do not have a filing obligation under the regulation.

Finally, Treasury did provide an exception to the annual filing requirement if there was no QEF or MTM election in place with respect to the shareholder and if certain conditions were satisfied:

  1. The shareholder is not subject to tax under IRC section 1291 with respect to any excess distributions or gains derived with respect to the PFIC that are treated as excess distributions an
  2. The aggregate value of all PFIC stock owned by the shareholder at the end of the shareholder’s taxable year did not exceed $50,000 ($25,000 for single filers and those filing separately) or the PFIC stock is owned by the shareholder through another PFIC, and the value of the shareholder’s proportionate share of the upper-tier PFIC interest in the lower tier PFIC does not exceed $5,000. 

No appraisal is required in determining the value of the PFIC stock and shareholders may rely on periodic account statements that are provided on an annual basis.

For purposes of determining whether the $25,000 threshold is met in the case of indirect ownership, shareholders must take into account all PFIC stock owned directly or indirectly except for PFIC stock owned through another U.S. person who is a shareholder of the PFIC.

The regulations also provide rules for attributing ownership of PFIC stock through corporations, partnerships, S corporations, estates and trusts. Treasury has indicated that additional guidance would be forthcoming on attribution from non-grantor trusts.

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