IRS Says PFIC Shareholder Reporting Not Due for Years Prior to 2013

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By Diane Freda

Dec. 30 --Under temporary rules released by the Internal Revenue Service, U.S. taxpayers will have to file a Form 8621 reporting their investments in passive foreign investment companies under Section 1298(f) for tax years ending on Dec. 31, 2013.

The IRS Dec. 30 released temporary and final rules (T.D. 9650) and proposed rules (REG-140974-11) that give guidance on determining ownership of a passive foreign investment company (PFIC), and on the annual filing requirements for PFIC shareholders.

The news was well received by practitioners, who said avoiding the expense and complexity of filing annual information returns is welcome.

The Hiring Incentives to Restore Employment (HIRE) Act “created an annual reporting requirement in 2010, and since then practitioners have been waiting to find out when this annual reporting requirement would take effect,” Arthur Dichter, partner at Cantor & Webb P.A., told Bloomberg BNA Dec. 30.

“They deferred the reporting a couple of times, but the first couple of times they deferred it they reserved the right to require all of the required reporting once the reporting started. These regulations clearly say they are not going to require taxpayers to do that.”

The annual reporting will begin for calendar year taxpayers' 2013 returns, Dichter said. And the information for 2010 through 2012, if not otherwise required to be reported anyway, isn't going to be required to be reported.

IRS said in June 2011 in Notice 2011-55 that it wouldn't require the reporting until there were regulations .

Another important development, Dichter said, is that the IRS has also come up with a threshold amount for establishing the reporting. The reporting would be required for individual shareholders with stock valued at $25,000 or more in the aggregate ($50,000 for joint filers), or for stock owned indirectly through another PFIC of at least $5,000. There were no thresholds prior to this.

The rules also say for example that if an investor holds an interest in a domestic hedge fund or private equity fund that owns interests in PFICs, as long as the entity itself has filed the form and there is a QEF or mark-to-market election, the individual members of the partnership aren't required to file the Form 8621.

IRS Asks for Comments.
At the same time, IRS in the proposed rules asked for public comments on all aspects of the temporary rules, but particularly whether, for ease of administration, the tax code Section 1291(d)(2) deemed-dividend and deemed-sale elections should be available at the domestic partnership level.

The proposed rules also suggested new definitions for the terms “pedigreed QEF,” “Section 1291 fund shareholder,” and “indirect shareholder,” and set annual information reporting requirements for certain shareholders of PFICs.

In the same package of guidance, IRS withdrew (REG-113350-13) a portion of rules (REG-209054-87) it proposed in April 1992 relating to the definition of those terms.

Estates, Trusts.
Among the revisions contemplated in the temporary rules are ones that would set up new rules for attributing ownership of PFIC stock through partnerships, estates and trusts.

Special rules were included for nongrantor trusts that allowed beneficiaries of those entities holding PFIC stock subject to the tax code Section 1291 excess distribution regime to use “a reasonable method” to determine their ownership interest, until further guidance is provided on estate and trust attribution, the rules said.

Moreover, until further guidance, beneficiaries of estates and nongrantor trusts that are subject to the Section 1291 regime for PFIC stock held by an estate or nongrantor trust are exempt from Section 1298(f) filing requirements for taxable years in which the beneficiary is not treated as receiving an excess distribution or as recognizing gain that is treated as an excess distribution with respect to the stock of the PFIC that the beneficiary is considered to own through the estate or trust.

The temporary rules don't provide guidance on the application of Section 1291 when an estate or nongrantor trust, or beneficiary, receives or is treated as receiving an excess distribution--including an amount of gain treated as an excess distribution.

“It would be unreasonable for the shareholders of the Section 1291 fund to take the position that neither the beneficiaries nor the estate or trust are subject to the tax and interest charge rules under 1291,” the IRS said.

Exception to Filing Form 5471.
In general, Section 1291 imposes a special tax and interest charge on a U.S. person that is a shareholder of a PFIC and that receives an excess distribution within the meaning of Section 1291(b) from a PFIC, or recognizes gain derived from a disposition of stock in a PFIC that is treated as an excess distribution.

Section 1298 sets forth special rules applicable to shareholders of PFICs, including attribution rules that treat a U.S. person as the owner of a PFIC stock that is owned by another person.

The temporary rules also provide guidance on an exception to the requirement for certain shareholders of foreign corporations to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Specifically, those rules pertain to certain U.S. persons that own an interest in a foreign corporation under constructive ownership rules.

The rules are to be published in the Dec. 31 Federal Register.

By Diane Freda

To contact the reporter on this story: Diane Freda in Washington at

To contact the editor responsible for this story: Cheryl Saenz at

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