PFIC Temp. (and Prop.) Regulations - mntaxclass.commntaxclass.com/files/A15_International.pdf · PFIC Temp. (and Prop.) Regulations (Dec. 31, 2013) 2. ... Qualified Electing Fund

Chapter 15

International Tax and Foreign

Financial Asset Reporting

1

Update

PFIC Temp.(and Prop.) Regulations

(Dec. 31, 2013)2

What is a PFIC?

3

A PFIC is a foreign corporation that meets one of two tests:

1) 75% "passive" income, or

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2) 50% of assets produce passive income or are held for the production of passive income.

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Ex: A Foreign

Mutual Fund6

No Minimum Ownership

Requirement

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How arePFIC

shareholders taxed?

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Three Regimes:1) IRC sec. 1291 Fund

2) Qualified Electing Fund (QEF)

3) Mark to Market9

2011

U.S.A.Foreign

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign Partnership

Foreign

14 Foreign Partnerships

U.S. Grantor Trust

The Romneys

PFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFICPFIC 17

233 Pages (of 379) for PFICs

Normally reporting numbers under $10 and often zeros.

With such Tiny Numbers Why

Comply?

13

If Form 8621 isnot filed,

then the statute of limitations on Form

1040 or 1120remains open

(until 8621 is filed + 3 years--IRC sec. 6501(c)(8))

14

Update

General Rule: A U.S. person that is shareholder of a PFIC must file Form 8621 (or successor form)

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Separate Form 8621 for Each PFIC

Update

For a tax year of the U.S. person ending

on or after Dec. 31, 2013

=All 2013 Calendar

Year Returns 16

Update

No annual filing requirement for TYBB

12/31/2013

(contrary to suspension threat in

Notice 2011-55)17

Update

18

Draft Form 8621

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Draft Part 1: “Reserved for Future Use”

Update

Filing Exception

A PFIC in which the shareholder is only subject to tax under

Sec. 1291 (NO QEF of MTM Election)

but no excess distributions or gains

and either 20

Update

A)aggregate value of all PFIC stock owned at year end > $25,000

($50,000 for MFJ)

21

Update

Shareholders must take into account all PFIC

stock owned directly or indirectly except for PFIC stock owned

through another U.S. person that itself is a

shareholder of the PFIC. 22

Update orB) the PFIC stock is owned

through another PFIC, and the value of the shareholder's proportionate share of the upper-tier PFIC's interest in the lower-tier PFIC does not exceed $5,000. (Reg. §1.1298-1T(c)(2)(i))

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Update

FMV? Shareholders may rely upon periodic account statements provided at least annually to determine the value of the PFIC.

24

Update

Attach Form 8621 to federal income tax

return (or, if applicable,

partnership or exempt organization return)

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Example

In January 2013, Wanda invested about $10,000 (.000264%) in a foreign partnership that owns 12 PFICs.

Each PFIC reports $0, income, distributions, etc.

Suggested Filing

Strategy

•File 12 separate Form 8621s.

•Make a QEF election for each.

•Report zeros in Form 8621 Part II.

x

If no prior QEF election, then make a deemed sale

election

xEnter Gain or Loss

In Part IVas

Excess Distribution

Make the Reg. sec. 1.1411-10(g) Election

to match net investment income

with Chapter 1 income for the PFIC

QEF.

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Draft

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15-1 Notice 2013-10 (Jan. 23, 2013)

IRS Defers Start Date For Form 8938 Filing By Specified Domestic

Entities to 2013 At The Earliest

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FBARS Must Be Filed Electronically

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FBAR Filing Authorization Form

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Check-the-Box For Late Filing Reason

Taxpayer X exercised ordinary business care and prudence, but was was unable to comply due to the following reasonable cause:

Taxpayer X exercised ordinary business care and prudence, but was was unable to comply due to the following reasonable cause:

“The taxpayer’s reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based.”

Compliance History. “Check the preceding tax years (at least three) for payment patterns and the taxpayer’s overall compliance history.”

Length of Time. “Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.”

Circumstances Beyond Taxpayer’s Control. “Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation.”

15-2

Rev Rul 2013-14 (June 24, 2013)

Mexican Land Trusts Are Not Trusts For U.S. Tax

Purposes

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15-4

National Taxpayer Advocate (NTA) 2012 Report to Congress

NTA Report Criticizes IRS OVDI For Discouraging Voluntary Compliance

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15-8

GAO Report on Offshore Disclosures

(March 2013)

IRS Has Collected Billions of Dollars, but May Be

Missing Continued Evasion

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StevenMichael

Rubenstein

$80,000Cayman Islands

Account

Unreported Interest & No

FBARs:$2,000 in 2010$2,000 in 2011$2,000 in 2012

15-2

Hom(DC CA 9/30/2013)

IRS May Use Income Tax Investigation Information

For FBAR Purposes

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15-2 In re Grand Jury

Proceedings(11 Cir. 2/7/2013)

Required Records Doctrine Trumps 5th

Amendment Rights For Foreign Bank Records

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15-3 Thomas v. UBS

(7th Cir. 02/07/13)

Seventh Circuit Soundly Rejects Former UBS

Clients' Suit To Recover Penalties

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15-3 “The plaintiffs, and the other members of the class—who number in the thousands—are American citizens who had bank accounts in UBS in 2008 when the UBS tax-evasion scandal (of which more shortly) broke. The accounts of the three plaintiffs were large—$500,000 to $2 million each. The plaintiffs had not disclosed the existence of the accounts on their federal income tax returns, as they were required to do by Form 1040, Schedule B, …”

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15-3 “They also did not disclose the income they earned in those accounts. Neither did they pay federal income tax on that income, though it was taxable. Eventually they ‘fessed up and paid the taxes they owed plus interest on those taxes and a 20 percent penalty. They did this pursuant to an IRS amnesty program, adopted in the wake of the scandal, called the “Offshore Voluntary Disclosure Program.”

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15-3

“The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties … from the source, in this case UBS, of the income concealed from the IRS.”

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15-4 “…our plaintiffs do not argue that they … received tax advice from UBS. They argue rather that the bank should have prevented them from violating the law. This is like suing one’s parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties.” 58

15-4 “…a bank is not a fiduciary of its depositors. It is merely a creditor. [Citations omitted] It has no duty to treat them like children or illiterates, and thus remind them that they have to pay taxes on the income on their deposits. It has no duty to read aloud to them line 7a on Schedule B of Form 1040.”

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15-4 “We needn’t discuss the plaintiffs’ remaining claims—of negligence and malpractice—as they are frivolous squared. This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn’t asked for the imposition of sanctions on the plaintiffs and class counsel.”

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15-9

Sergio Garcia(TC March 14, 2013)

Pro Golfer's Endorsement Income Reallocated As

65% Royalty, 35% Personal Services

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