IRS Form 8621 and PFIC Reporting Rules

This article provides guidance on how to report Passive Foreign Investment Company (“PFIC”) shares on a Form 8621. This article will discuss line-by-line the Form 8621. A U.S. person must file annually, with its federal income tax return for the year, a separate Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, for each PFIC for which the taxpayer was a shareholder during the taxable year.

The objective of the PFIC provisions of the Internal Revenue Code is to deprive a U.S. taxpayer of the economic benefit of deferral of U.S. tax on a taxpayer’s share of the undistributed income of a foreign investment company that has predominantly passive income. Although the PFIC provisions were aimed at U.S. persons holding stock in foreign investment funds, the PFIC provisions have a much broader impact. The PFIC provisions of the Internal Revenue Code may apply to any U.S. person holding stock in any foreign corporation, even one engaged in an active foreign business such as manufacturing, for any tax year in which the corporation derives enough passive income or owns enough passive assets to meet the definition of a PFIC.

Definition of PFIC

A foreign corporation is a PFIC if it satisfies either an income or asset test. Under the income test, a foreign corporation is a PFIC if 75% or more of the corporation’s gross income for the taxable year is defined as “foreign personal holding company” for purposes of Subpart F provisions of the Internal Revenue Code, with certain adjustments. Internal Revenue Code Section 954(c) defines “foreign personal holding company income” to include most types of passive income, such as interest, dividends, rents, annuities, royalties and gains from the sale of stock, securities or other property that produces interest, dividends, rents, annuities or royalties. See IRC Section 954(c)(1)(A) and (c)(1)(B)(i). The adjustments include exclusions for income derived from the active conduct of a banking, insurance, or securities business, as well as any interest, dividends, rents, and royalties received from a related person to the extent such income is properly allocable to nonpassive income of the related person. A “related person” is defined in Internal Revenue Code Section 954(d)(3). An individual, corporation, partnership, trust or estate that controls or is controlled by a controlled foreign corporation (“CFC”) is a “related person.” Control means, in the case of a corporation, direct or indirect ownership of more than 50 percent of the total voting power or value of the stock of the corporation.

For purposes of the income test, passive income is subject to four exceptions. The first two exceptions relate to income from the active conduct of a banking or insurance business. See IRC Section 1297(b)(2)(A) and (B). The third covers interest, dividend, rent or royalty income received from a related person to the extent that such income is properly allocated to income of such related person that is not passive income. See IRC Section 1297(b)(2)(C). The fourth covers certain foreign trade income subject to special treatment under two preferential tax regimes for export sales.

Under the asset test, a foreign corporation is a PFIC if the average market value of the corporation’s passive assets during the taxable year is 50% or more of the corporation’s total assets. An asset is characterized as passive if it has generated (or is reasonably expected to generate) passive income in the hands of the foreign corporation. See IRC Section 1297. Assets that generate both passive and nonpassive income in a tax year are treated as partly passive and partly nonpassive to the proportion to the relative amounts of the two types of income generated by those assets in that year. See IRC Notice 88-22. Both the Internal Revenue Service (“IRS”) and taxpayers may apply a PFIC test using the adjusted bases of its assets (as determined for earnings and profits purposes) in lieu of their value. However, a publicly traded corporation is required to use the value of its assets in applying the asset test. A PFIC that is also a CFC but is not publicly traded is required to use the adjusted bases of its assets in applying the asset test for PFIC status with no option to use the value of its assets.

Taxation of a PFIC

A shareholder of a PFIC is subject to the Section 1291 excess distribution rules in which shareholders must allocate excess distributions and gains realized upon the sale of their PFIC shares pro rata to their holding period. See IRC Section 1291(a)(1)(A).

An excess distribution includes the following:

1. A gain realized on the sale of PFIC stock, and
2. Any actual distribution made by the PFIC, but only to the extent the total actual distribution received by the taxpayer for the year exceeds 125 percent of the average actual distribution received by the taxpayer in the preceding three taxable years. The amount of an excess distribution is treated as if it had been realized pro rata over the holding period of the foreign share and, therefore, the tax due on an excess distribution is the sum of the deferred yearly tax amounts. This is computed by using the highest tax rate in effect in the years the income was accumulated, plus interest. Any actual distributions that fall below the 125 percent threshold are treated as dividends. This assumes they represent a distribution of earnings and profits, which are taxable in the year of receipt and are not subject to the special interest charge.

Interest charges are assessed on taxes deemed owed on excess distributions allocated to tax years prior to the tax year in which the excess distribution was received. All capital gains from the sale of PFIC shares are treated as ordinary income for federal tax purposes and thus are not taxed at favorable long-term capital gains rates. See IRC Section 1291(a)(1)(B). In addition, the Proposed Regulations state that shareholders cannot claim capital losses upon the disposition of PFIC shares. See Prop. Regs. Section 1.1291-6(b)(3).

Making a Qualified Electing Fund Election to Avoid the PFIC Tax Regime

A “Qualified Electing Fund” election taxes PFIC differently than the default PFIC regime. Every shareholder who has elected to make a qualified electing fund treatment with respect to a PFIC will currently include in gross income that shareholder’s pro rata share of the PFIC’s earnings and profits. See IRC Section 1293. Shareholders making a qualified electing fund election may decide to defer U.S. tax on amounts included in income for which no current distributions have been received. However, the shareholder must pay an interest charge on the deferred tax. See IRC Section 1294. A shareholder who has made a qualified electing fund election includes in gross income the shareholder’s pro rata share of the fund’s ordinary earnings earnings for the year as ordinary income and the pro rata share of the fund’s net capital gain for the year as long-term capital gain. See IRC Section 1293(a)(1). The election to have a PFIC as a qualified electing fund is made at the U.S. shareholder level on a shareholder-by-shareholder basis.

If a shareholder owns stock in a PFIC which was not a qualified electing fund for prior years but has now become a qualified electing fund, an election is available under Section 1291(d)(2)(A) that permits shareholders to purge the stock of the Section 1291 taint. The shareholder may make this election only for the first tax year in which the PFIC becomes a qualified electing fund. Under the election, the shareholder recognizes gain on the first day of the first tax year that the PFIC becomes a qualified electing fund as if the shareholder’s stock had been sold for its fair market value on that date. This gain is subject to the deferred tax and interest charge rules discussed in Internal Revenue Code Section 1291. A shareholder may also purge PFIC taint by including in gross income as a dividend its share of the corporation’s earnings and profits accumulated during the period the shareholder held the stock while the corporation was a PFIC. This dividend is treated as a distribution for purposes of Internal Revenue Code Section 1291.

Making a Mark-To-Market Election to Avoid the PFIC Tax Regime

Under Internal Revenue Code Section 1296, a shareholder owning stock in a PFIC may elect to mark-to-market the stock of a PFIC if it is “marketable stock.” Under Section 1296, if the fair market value of the stock in the PFIC at the end of the tax year exceeds the shareholder’s adjusted basis in the stock, the shareholder includes in income the amount of such excess. See IRC Section 1296(a)(1). Amounts included in a PFIC shareholder’s gross income under Section 1296 are not treated as favorable qualified dividends. If the shareholder’s adjusted basis in the PFIC’s stock exceeds the fair market value of the stock at the end of the tax year, the shareholder is entitled to a deduction equal to the lesser of (i) the amount of such excess or (ii) the “unreversed inclusions” with respect to the stock. See IRC Section 1296(a)(2). The “unreversed inclusions” are the excess of the prior inclusions in income under this election over the prior deductions taken under this election. See IRC Section 1296(d). Once made, the election applies to the tax year for which it is made and all later years unless 1) the stock ceases to be marketable stock, or 2) the election is revoked with the consent of the IRS.

Amounts included in income under the mark-to-market election and any gain on the sale of marketable stock in a PFIC with respect to which the election is made are treated as ordinary income. Any amounts deducted under this mark-to-market election and any loss on the sale of the marketable stock in a PFIC with respect to which the election is made are treated as an ordinary loss that is deductible in computing adjusted gross income. In the case of losses from the sale of stock, this characterization rule is limited to the extent that the loss does not exceed the “unreversed inclusion” with respect to the stock; any loss in excess of this amount is characterized under the normal rules regarding capital gains and losses. See IRC Section 1296(c)(1).

The mark-to-market election applies only to stock in a PFIC that meets the definition of “marketable stock” in Section 1296(e) of the Internal Revenue Code. To qualify as marketable stock, Internal Revenue Code Section 1296(e)(1)(A) provides that the stock in the PFIC must be regularly traded on either 1) a national market system exchange that is registered with the Securities and Exchange Commission; 2) the national market system established under the Securities and Exchange Act of 1934, or 3) an exchange that the IRS determines “has rules sufficient to ensure that the market price represents a legitimate and sound fair market value.” See Treas. Reg. Section 1.1296-2(a)-(c). Marketable stock also includes stock in a foreign corporation that is comparable to a U.S. regulated investment company and issues stock which is offered for sale or is outstanding and is redeemable at its net asset value. See IRC Section 1296(e)(1)(B).

Information Reporting for PFIC Shareholders

A Form 8621 must be filed by direct and indirect holders of PFICs for each tax year under the following five circumstances if the U.S. person:

1) Receives certain direct or indirect distributions of PFIC stock;

2) Recognizes gain on a direct or indirect disposition of PFIC stock;

3) Is reporting information with respect to a Qualified Electing Fund or Section 1296 mark-to-market election;

Generally, a U.S. person is an indirect shareholder of a PFIC if it is:

1) A 50% or more shareholder of a foreign corporation that is not a PFIC and that directly or indirectly owns stock of a PFIC;

2) A shareholder of a PFIC where the PFIC itself is a shareholder of another PFIC;

3) A 50% or more shareholder of a domestic corporation where the domestic corporation owns a Section 1291 fund; or

4) A direct or indirect owner of a pass-through entity where the pass-through entity itself is a direct or indirect shareholder of a PFIC;

5) A U.S. person that owns stock in a PFIC through a tax-exempt organization is not treated as a shareholder of a PFIC. This includes: i) an organization or an account that is exempt under Section 501(a); ii) a state college or university described in Section 511(a)(2)(B) of the Internal Revenue Code; iii) a state college or university described in Sections 511(a)(2)(B); v) a plan described in Section 403(b) or 457(b); vi) an individual retirement plan or annuity as defined in Section 7701(a); vii) a qualified tuition program defined in Sections 529 or 530; and viii) a qualified account used to pay for disability expenses defined in Section 529A.

In general, the following interest holders must file Form 8621 of a PFIC:

1) A U.S. person that is an interest holder of a foreign pass-through entity that is a direct or indirect shareholder of a PFIC;

2) A U.S. person that is considered (under Sections 671 through 679) the shareholder of PFIC stock held in trust;

3) A U.S. partnership, S corporation, U.S. trust or U.S. estate that is direct or indirect shareholders of a PFIC.

Failing to timely file a Form 8621 leaves open the statute of limitations on all tax matters for that year indefinitely until the Form 821 is filed with the IRS. There is no Form 8621 penalty penalty.

The Form 8621 has six parts which are discussed below.

Part I of Form 8621. Summary of Annual Information

In general, all shareholders of PFICs must complete Part 1 of Form 8621. However, a shareholder of a PFIC that is marked to market is generally not required to complete Part 1 of Form 8621. Treasury Regulation Section 1.1298-1 also requires a U.S. person that is at the lowest tier in a chain of ownership during the year to complete Part 1 of the Form 8621.

Part 1 of Form 8621 asks five questions.

Line 1 asks the shareholder to describe each class of shares held.

Line 2 asks the shareholder to provide the date during the tax year that the shares were acquired.

Line 3 asks the shareholder to list the number of shares held at the end of the tax year.

Line 4 asks the shareholder to state the value of the shares held at the end of the tax year. Shareholders may rely upon periodic account statements provided at least annually to determine the value of the PFIC unless the shareholder has actual knowledge of reason to know the value of the shares based on readily accessible information that the statements do not reflect a reasonable estimate of the PFIC value.

Line 5. The shareholder must indicate the type of the PFIC such as Section 1291 default classification, qualified electing fund method, or mark-to-market method. Line 5 also asks the shareholder to state the amount of any excess distribution or gain treated under Section 1291 of the Internal Revenue Code.

Part II of Form 8621

Part II of the Form 8621 is used by PFIC shareholders to determine excess distributions and gains. Part II is also used to make elections to treat PFICs as under the qualified electing fund method per Internal Revenue Code Section 1295. A separate election must be made for each PFIC that a shareholder wants to be treated under the qualified electing fund method.

Part II of Form 8621 contains Boxes A through H. The shareholder must check the box that is applicable to its case,

Box A. A PFIC Shareholder should check Box A to treat a PFIC under the qualified electing fund method. The instructions to Form 8621 provide detailed instructions to PFIC shareholders that wish to make a late election to treat a PFIC under the qualified electing fund method. A shareholder may make a qualified electing fund election after the election due date on Part II of the Form 8621 if:

1) The shareholder has preserved its right to make a retroactive election under the protective statement regime.

2) The shareholder obtains the permission of the Internal Revenue Service (“IRS”) under the consent regime.

Protective Statement Regime

Under the protective statement regime, a shareholder may preserve the ability to make a retroactive election if the shareholder:

1. Reasonably believed, as of the due date for the making of the qualified electing fund method, that the foreign corporation was not a PFIC for its tax year that ended during that year (retroactive year);

2. Filed the protective statement with respect to the foreign corporation, applicable to the retroactive election year, in which the shareholder describes the basis for its reasonable belief;

3. Extended, in the Protective Statement, the periods of statute of limitations on the assessment of taxes under the PFIC rules for all tax years to which the protective statement applies; and

4. Complied with the other terms and conditions of the protective statements.

The protective statement must be attached to the shareholder’s tax return for the shareholder’s first tax year to which the statement will apply.

Under the consent regime, a shareholder that has not satisfied the requirements of the protective regime may request that the IRS permit a retroactive election. The consent regime applies only if:

1. The shareholder reasonably relied on tax advice of a competent and qualified tax professional;

2. The interest of the U.S. Government will not be prejudiced if the consent is granted;

3. The shareholder requests consent before the PFIC status issue is raised on audit; and

4. The shareholder satisfied the procedural requirements under Treasury Regulation Section 1.295-3(f)(4).

For each year of the PFIC ending in a tax year of a shareholder to which the qualified electing fund election applies, the PFIC must provide the shareholder with a PFIC Annual Information Statement. The statement must contain certain information, including:

1. The shareholder’s pro rata share of the PFIC’s ordinary earnings and net capital gain for that tax year, or

2. Sufficient information to enable the shareholder to calculate its pro rata share of the PFIC’s ordinary earnings and net capital gains for that tax year.

If the shareholder holds stock in a PFIC through an intermediary, an Annual Intermediary Statement may need to be issued in lieu of the PFIC Annual Intermediary Statement.

For all tax years subject to the qualified electing fund method, the shareholder must keep copies of all Form 8621, attachments, and PFIC Annual Information Statements or Annual Intermediary Statements. Failure to produce these documents at the request of the IRS may result in the invalidation or termination of the election.

Box B. A PFIC shareholder may make an election by Box B of Part II to extend the election for the payment of tax. If this election is made, interest will be imposed on the amount of the deferred tax. The interest must be paid on the termination of the election. This election must be made by the due date, including extensions, of the shareholder’s tax return for the tax year for which the shareholder reports the income related to the deferred tax.

To make an election to deferred tax, the shareholder must not only check Box B in Part II, the shareholder must also complete lines 8a through 9c of Part III of Form 8621.

Box C. A shareholder checks Box C of Part II to make a mark-to-market election. This election must be made on or before the due date (including extensions) of the U.S. person’s income tax return of the U.S. person’s income tax return for the tax year in which the stock is marked to market under Internal Revenue Code Section 1296.

Boxes D and E. A PFIC shareholder will check Box D or E to make a “Deemed Sale Election” and “Dividend Election in Connection With a QEF Election.” A PFIC shareholder may have made an election to treat a PFIC under the qualified electing fund method. However, if the foreign shares were classified as PFICs for previous years, the shares will be classified as unpedigreed QEF (“qualified electing fund”) and the shareholder should make an election to “purge” the PFIC taint thereby avoiding the excess distribution in the future with respect to the PFIC. A shareholder making this election is treated as receiving a dividend equal to its pro rata share of the post-1986 earnings and profits of the PFIC on the qualified date. The deemed dividend is taxed as an excess distribution, allocated only to the days in the shareholder’s holding period during which the foreign corporation qualifies as a PFIC.

Box D is checked for a deemed sale election under a deemed sale election under Section 1291(d)(2)(A). Once a shareholder makes a QEF election, the shareholder can establish the fair market value of the foreign stock on the first date of the tax year of the QEF election, the shareholder then must recognize the gain in the stock as if he or she sold the stock on the first day of the QEF election.

Box E is checked for a deemed dividend election under Section 1291(d)(2)(B). A deemed dividend is treated as an excess distribution. Section 1291(b)(2) generally defines a shareholder’s excess distribution as the excess of total distributions received by the shareholder for the tax year over 125% of the average amount of distributions received by the shareholder in the three preceding years. To make an election under Box E, the shareholder must attach a statement to Form 8621 that demonstrates the calculation of its pro rata share of 1986 earnings and profits. The post-1986 earnings and profits may be reduced by the amount that the shareholder previously included in its income or in the income of another U.S. person.

Elections made under Box D or E must be made by the due date, including extensions of the shareholder’s original return (or by filing an amended return within 3 years of the due date of the original return) for the tax year that includes the qualified date.

Boxes F, G and H. A PFIC shareholder checks Box F, G, and H to make an election to recognize gain on deemed sale of a PFIC or Section 1297(e) PFIC. A PFIC shareholder may make certain purging elections with respect to a foreign corporation that qualifies as a “former PFIC” or a Section 1297(e) PFIC.” A shareholder making a deemed sale election with respect to a former PFIC shall be treated as having sold all of its stock in the former PFIC for its fair market value on the termination date. These purging elections result in the foreign corporate stock not being treated as a PFIC. A PFIC shareholder checks Box F or G if it is making a purging election under Section 1297(e) in connection with a sale of the stock.

Box F is checked with respect to a former PFIC.

Box G is checked with respect to a dividend election with respect to a Section 1297(e) PFIC. A shareholder checking Box G must attach a statement to Form 8621 showing the calculation of its pro rata share of post-1986 earnings and profits of the Section 1297(e) PFIC.

Box H is checked for dividend elections under Section 1298(b)(1). Box H is checked when a shareholder wishes to make a late purging election. A shareholder may make an election for a late purging if: 1) the shareholder is requesting consent before an IRS audit; 2) the shareholder has entered into a closing agreement with the IRS; and 3) the interests of the U.S. government are not prejudiced.

Part III. Income from a Qualifying Electing Fund

Part III of Form 8621 is used to summarize the total tax and distributions received from a PFIC during the tax year. Part III of Form 8621 is also used to provide the IRS with a summary of any elections made in previous years under the default PFIC method, qualified electing fund method, and mark-to-market method.

Lines 6a and 7a. For Lines 6a and 7a, the shareholder should enter its pro rata share of the ordinary earnings and net capital gain of the QEF.

Lines 6b and 7b. For Lines 6b and 7b, the shareholder should enter its ordinary earnings and net capital gain of the QEF that is reduced by the amounts the shareholder included in income under Section 951 of the Internal Revenue Code with respect to the QEF. (Section 951 requires a U.S. shareholder with stock of a controlled foreign corporation (“CFC”) to include in income its pro rata share of the corporation’s subpart F income).

Line 6c. For Line 6c, the shareholder subtracts Line 6b from Line 6a. The amount stated on Line 6c is treated as ordinary income. For noncorporate taxpayers, this amount is included as “other income” on Schedule 1, line 8z. For corporate taxpayers, this amount is included as “other income” on Line 10 of Form 1120.

Line 7a. For Line 7a, the shareholder enters its pro rata share of the total net capital gain of the QEF.

Line 7b. For Line 7b, the shareholder enters the portion of Line 7a that is included in income under Section 951 or amounts that may be excluded under Section 1293(g). (Section 1293(g) excludes from income for purposes of PFIC or QEF income calculations income received from a CFC, income received from sources within the United States, or income being included in the gross income of a U.S. shareholder more than once.

Line 7c. For Line 7c, the shareholder subtracts Line 7b from Line 7a. This amount is a net long-term capital gain. This amount is entered on an noncorporate taxpayer’s Part II of Schedule D of an individual income tax return.

Line 8. If a shareholder received a distribution from the QEF during the current tax year, the distribution is first treated as a distribution out of the earnings and profits of the QEF accumulated during the year. If the total amount distributed stated on Line 8b exceeds the income stated on Line 8a, the excess is treated as distributed out of the most recently accumulated earnings and profits. This amount is not taxable to the shareholder if it can be demonstrated to the IRS that it was previously included in the shareholder’s income or the income of another U.S. shareholder.

Line 9a. For Line 9a, the shareholder should enter the total tax for the tax year.

Line 9b. For Line 9b, the shareholder should enter the total tax for the tax year determined without regard to the amount entered on Line 8e.

Line 9c. For Line 9c, the shareholder should subtract Line 9b from 9a.

Part IV. Gain or (Loss) from Mark-to-Market Election

If a PFIC shareholder has made a mark-to-market election under Section 1296, the shareholder is required to complete Part IV of Form 8621.

Line 10a. For Line 10a, the shareholder should enter the fair market value of the PFIC stock at the end of the tax year.

Line 10b. For Line 10b, the shareholder should enter its adjusted basis of the stock at the end of the tax year.

Line 10c. For Line 10c, the shareholder should subtract Line 10b from Line 10a. If there is a gain, the shareholder should include the amount of gain as ordinary income on its tax return. If the fair market value of the PFIC stock at the close of the tax year is more than the shareholder’s adjusted basis in the stock, the excess is treated as ordinary income. If the adjusted basis of the stock is more than the fair market value as of the close of the tax year, the excess is allowed as a deduction, but only to the extent of, the lesser of: 1) the amount of excess of Line 10C or 2) the unreversed inclusion with respect to the stock.

Internal Revenue Code Section 1296(d) defines the term “unreversed inclusion” with respect to a PFIC as the excess of (if any):

Section 1296(d)(1)

The amount included in gross income of the shareholder with respect to such stock for prior taxable years, over

Section 1296(d)(2)

The amount allowed as a deduction with respect to such stock for prior tax years.

Line 11. For Line 11, the shareholder should enter the unreversed inclusion as defined in Section 1296.

Line 12. For Line 12, the shareholder should enter the loss from Line 10c, but only to the extent of unreversed inclusions on Line 11.

Line 13a. For Line 13a, the shareholder should enter the fair market value of the stock on the date of the sale or disposition.

Line 13b. For Line 13b, the shareholder should enter the adjusted basis of the stock on the date of the sale or disposition.

Line 13c. For Line 13c, the shareholder should subtract Line 13b from Line 13a. If the fair market value of the stock on the date of sale or disposition (line 13a) is more than the shareholder’s adjusted basis in the stock on the date of sale or disposition (Line 13b), the Line 13c excess is a gain and treated as ordinary income. If the adjusted basis of the stock (Line 13b) is more than its fair market value (Line 13a), the excess is a loss and is entered on Line 13c as a loss.

Line 14a. For Line 14a, the shareholder enters any unreversed inclusions with respect to the stock.

Line 14b. For Line 14b, the shareholder enters the loss reported on Line 14b, but only to the extent of unreversed inclusions stated on Line 14a. This loss is treated as ordinary loss.

Line 14c. For Line 14C, the shareholder should enter the amount by which the loss on Line 13c is more than the unreversed inclusions.

Part V. Distributing From Dispositions of a Section 1291

Part V must be completed for each excess distribution from a 1291 fund.

Line 15a. For Line 15a, the shareholder should enter the total distributions from the Section 1291 fund during the tax year with respect to the applicable stock. Section 1291 uses the term “excess distribution” for U.S. tax purposes. Excess distributions are actual distributions that are in excess of 125 percent of average distributions received in the preceding three years in which the PFIC were owned. All gains realized upon the disposition of PFIC shares are considered excess distributions. See IRC Section 1291(a)(2).

Line 15b. For Line 15b, the shareholder enters the total distribution (reduced by the portions of such distributions that were excess distributions but not included in income under Section 1291(a)(1)(B) made by the fund with respect to the applicable stock for each of the three years preceding the current tax year.

Line 15c. For Line 15c, the shareholder should divide the amount on Line 15B by 3. If the number of tax years in the shareholder’s holding period preceding the current year is less than 3, the shareholder should divide the amount on Line 15b by that number.

Line 15d. For Line 15d, the shareholder should multiply Line 15c by 125 percent (1.25).

Line 15e. For Line 15e, the shareholder should subtract Line 15d from 15a. If this amount is more than zero, this is the amount of the excess distribution. If there is an excess distribution, the shareholder should complete Line 16.

Line 15f. For Line 15f, the shareholder should enter the gain or loss from the disposition of stock of a Section 1291 fund or former 1291 fund. If the shareholder had a gain, the gain is reported on Line 16. If the shareholder had a loss, the loss should be shown in brackets and Line 16 should not be completed.

Line 16a. For Line 16a, if there is a positive amount on Line 15e or 15F (or both), the shareholder should attach a statement for each excess distribution and disposition. The shareholder should show its holding period for each share of stock or block of shares held.

Line 16b. For Line 16b, the shareholder should enter the total amounts determined in Line 16a that are allocable to the current tax year and tax years before the foreign corporation became a PFIC.

Line 16c. For Line 16c, the shareholder should enter the aggregate increase in tax (before credits) for each tax year in the shareholder’s holding period.

Line 16d. For Line 16d, the shareholder should enter the foreign tax credit amount. Foreign taxes must be credible under general foreign tax credit principles. Foreign tax credits for excess distribution taxes are determined by apportioning the total creditable foreign taxes between the part of the distribution that is an excess distribution and the part that is not. The excess distribution taxes allocated to a PFIC only reduces the increase in tax figures for that year. No carryover of any unused excess distribution taxes is permitted.

Line 16e. For Line 16d, the shareholder subtracts Line 16d from Line 16c. This amount is entered on a shareholder’s tax return as “additional tax.”

Line 16f. For Line 16f, the shareholder determines interest on each net increase in tax determined on line 16e using the rates and methods discussed in Section 6621 of the Internal Revenue Code. Section 6621 of the Internal Revenue Code establishes the interest rates for purposes. Under Section 6621(a)(1), the interest rate for PFIC purposes is generally the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation).

Part VI. Status of Prior Year Section 1294 Elections and Terminations of Section 1294 Elections

Section 1294 permits PFIC shareholders to make an election for time to pay any undistributed PFIC earnings. Shareholders that made a Section 1294 election must complete Part VI of the Form 8621.

Line 17. For Line 17, the shareholder enters the last day of each tax year for which a Section 1294 election is outstanding. Section 1294 provides for a payment extension election for undistributed PFIC earnings tax liability.

Line 18. For Line 18, the shareholder should enter the undistributed earnings of a QEF in the year for which the payment of tax was extended under Section 1294.

Line 19. For Line 19, the shareholder should enter the tax for which payment was extended by Section 1294 election entered on Line 17.

Line 20. For Line 20, the shareholder should enter the accrued interest (As determined under Section 6621) on the deferred tax.

Line 21. For Line 21, the shareholder should enter events that occurred during the tax year that terminated one or more of Section 1294 elections reported on Line 17. An election will be terminated in whole or in part when any of the following events take place: 1) an actual or deemed distribution of earnings to which the election is attributable (a loan, pledge, or guarantee by the QEF to of for the benefit of the shareholder may cause a deemed distribution of the earnings); 2) a disposition of stock in the QEF, including a pledge by the shareholder of stock as security for a loan; or 3) a change of status of the QEF (i.e., the foreign corporation is no longer a QEF or PFIC).

Line 22. For Line 22, the shareholder should enter the earnings distributed or deemed distributed as a result of events discussed on Line 21. An election may be terminated and result in a distribution if the following takes place: 1) a distribution of earnings will terminate an election to the extent the election is attributable to the earnings distributed; 2) a loan, pledge, or guarantee by the QEF made directly or indirectly to the electing shareholder or related person will terminate an election to the extent of the undistributed earnings equal to the amount loaned, secured, or guaranteed; 3) a disposition of stock; or 4) a change in status of the QEF.

Line 23. For Line 23, the shareholder will enter the deferred tax due from the termination of the Section 1294 election.

Line 24. For Line 24, the shareholder should enter the interest accrued on the deferred tax. Interest accrues beginning on the due date (without regard to extensions) on the due date of the tax return. Interest is computed using the rates and methods under Section 6621 discussed above.

Lines 25 and 26. For Lines 25 and 26, the shareholder should list the deferred tax outstanding and the interest accrued after partial termination of a Section 1294.

Conclusion

This article is intended to provide the reader with a basic understanding regarding the Form 8621. It should be evident from this article that Form 8621 is an extremely complicated form. Failure to properly complete the Form 8621 can result in extending the period of time that the IRS has to audit your income tax return. Incorrectly reporting PFIC transactions on a Form 8621 and other information returns can trigger significant penalties. As a result, it is crucial that an investor holding foreign stocks consult with an international tax attorney to ensure that foreign stock transactions are properly reported on a U.S. tax return. An international tax attorney may also provide individualized planning to the investor that may substantially reduce his or her U.S. tax liabilities emanating from the foreign stocks.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.