Removing PFIC Taint on Foreign Investments Through Subsequent Year QEF Elections

Navigating PFIC Rules of IRC Sections 1291-1298

A live 90-minute CLE/CPE webinar with interactive Q&A


Tuesday, August 1, 2017 (in 9 days)
1:00pm-2:30pm EDT, 10:00am-11:30am PDT


This webinar will provide tax attorneys and counsel with a practical guide to removing the “taint” of foreign investments that are treated as passive foreign investment companies (PFICs). The panel will discuss the complex qualified electing fund (QEF) election rules, detailing the advantages, disadvantages and calculations involved in making a QEF election, and will discuss the planning opportunities in electing out of PFIC treatment.

Description

The PFIC regime imposes a set of U.S. tax rules that are among the most onerous in all of the Internal Revenue Code. The PFIC rules expose U.S. taxpayers owning stock in passive foreign investment companies to an ordinary income and accrued interest regime that is complicated and expensive. Unlike controlled foreign corporation rules, there are no ownership thresholds for PFIC status.

Because the PFIC regime is intended to prevent U.S. persons from deferring U.S. taxation on passive investments held through foreign companies, taxpayers may avoid the ordinary income and interest treatment by electing to be taxed currently on income from their PFIC holdings.

The primary mechanism for opting out of the PFIC regime is the election to treat the PFIC as a QEF. This election allows U.S. taxpayers to preserve capital gain treatment for their PFIC gains and to avoid interest accrual by paying tax currently on their pro rata share of income and gain from the QEF.

The QEF election avoids the ordinary income and interest scheme altogether if made at the time the foreign investment is acquired. Taxpayers wishing to make a QEF election in years after the year they first acquired the stock must make an additional “purging election” to remove the “PFIC taint” from the stock.

This additional election—which involves gain recognition—is reported on Form 8621. Alternatively, taxpayers holding PFIC stock may be able to make a mark-to-market election for their PFIC stock, reporting proceeds from deemed sales annually as ordinary income, but only if the PFIC stock is publicly traded.

Listen as our experienced panel goes beyond the basics of Form 8621 to provide a thorough discussion of QEF elections and other means of avoiding the PFIC regime.

Outline

  1. Code Provisions governing PFIC treatment, purging and deemed distribution rules
    1. Section 1291 default treatment
    2. Section 1295 QEF provisions
    3. Section 1296 mark-to-market option
    4. Section 1298 special rules
  2. Ownership rules
    1. When PFIC shares are owned by pass-through entity
    2. When PFIC shares are owned by a trust or estate
    3. Rules when a foreign corporation or entity is classified as both a PFIC and a controlled foreign corporation
  3. Purging elections to remove PFIC “taint”
  4. Making election in year of purchase
  5. Making election in a subsequent year after initial purchase
  6. Mark-to-market elections
  7. Entity classification elections

Benefits

The panel will discuss these and other important issues:

  • Identifying assets that qualify as PFIC holdings
  • Differentiating tax results between PFIC, mark-to-market and QEF scenarios
  • Assessing the tax impact of a QEF election in a year subsequent to acquisition of the PFIC stock

Learning Objectives

After completing this course, you will be able to:

  • Determine scenarios in which to make a QEF election
  • Identify the elections necessary to make a QEF election in a year subsequent to asset acquisition
  • Discern whether a mark-to-market election would be available and might be advised
  • Recognize the current year tax impact of elections to remove PFIC taint from foreign investments

Faculty

Stephen Ziobrowski, Partner
Day Pitney, Boston

Mr. Ziobrowski practices in the area of tax planning for businesses and individuals. On the business side, he advises clients on business formations, reorganizations, spin-offs, sales and liquidations, and equity-based compensation plans, including qualified and nonqualified stock options. He also does tax planning for S corporations, partnerships, and limited liability companies in various business ventures. On the individual side, he advises clients on like-kind exchanges, alternative minimum tax, international tax issues, and other tax matters. He is a frequent lecturer at seminars and continuing education programs for lawyers and accountants.

Carl A. Merino, Counsel
Day Pitney, New York

Mr. Merino represents U.S. and non-U.S. families and companies on a wide range of personal and business tax matters, including cross-border income and estate tax planning, corporate and partnership tax issues, S corporations and income taxation of trusts and estates. He works extensively in the international tax arena. He advises non-U.S. clients on structuring inbound investments to minimize federal and state income and estate tax exposure. He advises U.S. clients on tax aspects of foreign investments, including anti-deferral rules, entity classification issues and reporting requirements for foreign entities and trusts. His work in this area also encompasses pre-immigration and expatriation planning, tax issues of foreign trusts with U.S. beneficiaries, cross-border compensation and employment tax issues and corporate structuring for foreign companies setting up U.S. operations.

Patrick J. McCormick, J.D., LL.M.
Kulzer & DiPadova, Haddonfield, N.J.

Mr. McCormick specializes in the areas of international taxation, tax compliance, and offshore reporting obligations. He published national articles and given numerous national and local presentations on assorted areas of tax and estate planning law, including international tax and offshore compliance issues. His latest article on PFICs is titled Tax Reporting Implications of Foreign Mutual Funds. He is licensed to practice in the States of New Jersey, Florida, and Georgia, and the Commonwealth of Pennsylvania.


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Continuing Professional Education credit processing is available for an additional fee per person. You may register for CPE credit processing at any time before or after the program. To qualify for CPE you may not listen via the telephone.

This program is eligible for 1.5 CPE credits.

  • Field of Study: Taxes.
  • Level of Knowledge: Intermediate.
  • Advance Preparation: None.
  • Teaching Method: Seminar/Lecture.
  • Delivery Method: Group-Internet (via computer).
  • Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of verification codes announced throughout the presentation.
  • Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules; supervisory authority over other preparers/accountants. Knowledge and understanding of passive foreign investment company (PFIC) rules, including taxation of PFICs and filing requirements; familiarity with IRS Form 8621.

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