The Taxation of Passive Foreign Investment Company (“PFIC”): The Use of a Sledgehammer to Kill a Cockroach
By Anthony Diosdi Disclosing foreign financial accounts on U.S. tax returns is no simple process. This is because many foreign financial accounts contain mutual funds or foreign stocks. The taxation of foreign mutual funds and/or stocks is extremely difficult and can result in unintended tax consequences. Unintended tax consequences are the result of tax laws enacted by Congress over thirty years ago. Concerned that U.S. investors were receiving tax breaks by investing in offshore mutual funds or securities, in 1986, Congress added the Passive Foreign Investment Company (“PFIC”) provisions to the Internal Revenue Code. The object of the PFIC provisions is to deprive a U.S. taxpayer of the economic benefit of deferral of U.S. tax on the taxpayer’s share of the undistributed income of a foreign investment. The legislative history…