Offshore reporting is a hot topic these days. Most of the inquiries we receive concern FBARs and reporting offshore accounts. Sometimes, however, we get asked about foreign real estate reporting, foreign gifts and Passive Foreign Investment Companies (PFIC’s). Recently the IRS released Notice 2014-51, also known as “Section 1298(f) Reporting Requirements for U.S. Persons that Hold Stock of a Passive Foreign Investment Company that is Marked to Market Under Section 475 or Another Chapter 1 Code Provision Other Than Section 1296.”
The notice is highly technical but should be of interest to taxpayers invested in PFIC stock that is marked to market.
To understand the changes, a short discussion about PFICs is necessary.
A Passive Foreign Investment Company (PFIC) is a foreign corporation with at least one U.S. shareholder that has one of the following attributes:
1. At least 75% of the corporation’s income is considered “passive”, which is based on investments rather than standard operating business.
2. At least 50% of the company’s assets are investments that produce interest, dividends and/or capital gains
Common examples of PFICs are include foreign mutual funds, foreign partnerships and offshore pooled investment vehicles. Most U.S. investors in PFICs usually pay income tax on all distributions and appreciated share values, even if capital gains tax rates would normally apply.
Under section 3 of the notice, the IRS now recognizes that U.S. taxpayers holding stock in a PFIC that is “mark to market” under a non-section 1296 marked to market regime should not be subject to the reporting requirements of sec. 1.1298-1T. Mark to market is a measure of the fair value of accounts. It looks to market value and can change over time. The goal of such a valuation is to provide a realistic appraisal of a company’s current financial situation.
PFIC investors generally must file form 8621, “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.” The new rules may impact those reporting requirements.
This post contains a very general description of a very complex topic. Like all IRS rules, there are exceptions to the exceptions.
If you have questions about the new rules or filing requirements, give us a call. The new rules were originally published as temporary rules on December 31, 2013. They will soon become final rules and are effective for PFIC shareholders tax years ending on or after December 31, 2013..
Have questions about PFICs are other foreign reporting requirements? Give us a call. Our experienced IRS tax lawyers can help with a wide range of domestic or offshore tax matters. For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464.