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by: Vladyslav Golubovskyi 2015-03-10
I've written before about Passive Foreign Investment Company (PFIC) calculations, but that article was more limited to OVDP situations. In this article, I will describe in more detail the types of PFIC calculations that exist. I will describe when certain PFIC calculation types are mandatory and those which are optional in these following scenarios:
Again, these PFIC calculations are for a taxpayer whose return is not being filed under any OVDP, that is, just like a regular taxpayer making a timely filing.
If an MTM election has previously been made on a 2013 return, Form 8621 is needed to report 2014 mark-to-market gains/losses.
If no MTM election has been made, you must analyze which of the following options is most beneficial to the taxpayer:
This is fo taxpayers who have made a submission under the 2012/2014 Standard OVDP and are not opting out. That is, are paying the standard 12.5%, 27.5% or 50% Offshore penalty as the case may be.
In this case, no Form 8621 is needed for OVDP years, as calculations are done in accordance with the OVDP FAQ (not sec.1296 of the Code). Spreadsheet with calculations should be attached with the OVDP submission package.
Learn more about the OVDP procedures by clicking on the box below.
3. Standard OVDP client, that either does not make an MTM election or Opts-out of Standard OVDP:
Form 8621 is needed when there is a dividend distribution or sale of PFIC stock (see scenario 4 below for details). However, this form might be neglected by a Revenue Agent. But since Regular OVDP clients automatically get audited, any determinations made as a result of an audit get reflected on Form 4549-A, Form 906 and other forms used by the IRS during an audit.
For information about Opting-Out of a Standard OVDP, read this article.
No mark-to-market election is available for tax years with a past due date for such clients if you are in the Streamlined OVDP.
Form 8621 is needed when there is a dividend distribution or sale of PFIC stock.
Even if there is no excess distribution per our calculations, Form 8621 should still be submitted with lines 15a-15e completed in it. This will substantiate the amount of a dividend distribution that should flow onto Schedule B (non-excess distribution).
In accordance with Treas. Reg. 1.1298-1T, no Form 8621 is needed if the total value of PFICs owned by a taxpayer is less than $25,000 and such taxpayer is not treated as receiving an excess distribution.
However, preparing and submitting Forms 8621 may be optimal even if the calculations show no excess distribution because of the following reasons:
PFIC calculations are not for anyone but those who have the most advanced knowledge of both tax and accounting (although we know of a few very ambitious non-tax people who live the challenge of trying to figure it out!) Please, talk to your tax adviser about which options are open to you.
If you or your client is hung up on PFIC calculations, please feel free to contact us.