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USTaxAdvising
USTaxAdvising, CPA
Category: Tax
Satisfied Customers: 1237
Experience:  US Taxation specialist.
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Question about Sec 1291 gain/loss on a PFIC (Form 8621). Im

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Question about Sec 1291 gain/loss on a PFIC (Form 8621). I'm a US citizen, currently residing abroad. I purchased a foreign mutual fund (out of ignorance of the whole PFIC quagmire) in two lots - one in 2007 and one in 2008. I redeemed all shares (both lots) in 2011 for a net gain. I made a gain on the 2007 lot and a loss on the 2008 lot. My question pertains to reporting this on Form 8621.

From my reading of Form 8621 instructions, the sale is to be reported on a single Form 8621 (since it is a single mutual fund/PFIC) but because it involves two holding periods, Part IV of the form has to be filled out twice - once for each lot. Line 10f of each part IV will show the gain and loss of each lot respectively. The question is, when computing the tax and interest, should I use the net gain or do I have to compute the tax purely on the gain of the first lot for the first part IV instance, and separately for the second part IV (which will be 0 since the second lot was a loss)? If the former, does that mean I cannot use the loss on the second lot to offset a PFIC gain even if both lots were the same mutual fund?
Submitted: 4 years ago.
Category: Tax
Expert:  USTaxAdvising replied 4 years ago.

USTaxAdvising :

When computing the tax and interest you would only compute that for the shares/lot sold at a gain. Not for the shares sold at a loss.

USTaxAdvising :

So you will only have one part IV for the 8621

USTaxAdvising :

does that mean I cannot use the loss on the second lot to offset a PFIC gain even if both lots were the same mutual fund? - yes this is correct. Capital losses derived from the disposition of PFIC shares cannot be recognized per Treasury Regulation 1.1291-6(b)(3).

USTaxAdvising :

Basically the shares sold at a gain are what is known as a 1291 fund. The shares sold at a loss are gone. If you had not purchased the shares on different days/lots then you would not have this issue.

USTaxAdvising :

If the shares were publicly traded then you could have made the "mark to market election" thus eliminating the punitive interest charge. (just a note for future purchases of PFIC stock)(Generally you will want this stock to be publicly traded. If it is not publicly traded then you could inquire if you can get a "PFIC Statement" which will enable you to make a "QEF" Qualified Electing Fund election, which will also get you out of 1291 land.)

Customer:

Sigh, that was my reading as well and was hoping someone would tell me otherwise :-) In any case, the amounts are small enough not to really matter except for the pain in computing the interest

USTaxAdvising :

I hope this helps. Please let me know if you have any further questions.

USTaxAdvising :

Ahh yes, if the amounts are small it is quite an exercise working through the interest charge....

Customer:

I did make a Mark-to-Market for some other investments but was somehow under the impression that pure stock ETFs did not fall in the PFIC category

USTaxAdvising :

Yes these would be PFICs as well if they are foreign.

Customer:

And going back to refile amendments (don't think that's even possible for mark-to-market) is not worth the trouble

Customer:

Thanks for your answer

USTaxAdvising :

That's right, you can't make MTM election on an amended return. It must be made on a timely filed return.

Customer:

Does life insurance also fall under PFIC ?

Customer:

Or should I make that a separate question

Customer:

(feel free to tell me so!)

USTaxAdvising :

hang on one minute

USTaxAdvising :

sorry about that.

USTaxAdvising :

This is a seperate question but I don't mind at all.

USTaxAdvising :

Generally life insurance would not be a PFIC unless you were buying shares of the company.

USTaxAdvising :

If it was like a co-operative where you own shares then it would be a PFIC.

USTaxAdvising :

If only owning a beneficial interest it might be a foreign trust or partnership (perhaps)

Customer:

So surrendering / cashing a policy would be ordinary income?

Customer:

By the way, to be fair, I will adjust the payment to make it a separate question

USTaxAdvising :

I hope this helps, please let me know if you have any further questions.

Customer:

Did you have a response for my question about cashing in a life insurance policy?

Customer:

as ord income?

USTaxAdvising :

Yes this would be ordinary income to the extent the receipt exceeded your initial investment.


Customer:

OK, thanks, XXXXX XXXXX now...

USTaxAdvising :

Thanks!. If you ever have any further questions please feel free to ask me directly here - http://www.justanswer.com/finance/expert-ustaxadvising/

USTaxAdvising :

If I am not online I will have a response to you within 24 hours.

USTaxAdvising :

Best,

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