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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3857
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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My son in law received his green card 12/16/12 after marrying

Resolved Question:

My son in law received his green card 12/16/12 after marrying in July 2012. We were not aware that investments he has in the UK are characterized as PFIC's until March when trying to prepare a US tax return that included interest and dividends on these foreign accounts. It seems as though the complex and draconian PFIC rules apply even though there was no opportunity to avoid them.

1) Is there an exemption or grace period under which a new Green card holder can dispose of these investments, without the substantial and adverse tax consequences? To include this in ordinary income seems extraordinarily unfair.

2) As I understand it, if he elects mark-to-market on the Form 8621, we would need to determine the FMV of each of the funds at 1/1/12 and 12/31/12 and include that difference as ordinary income for 2012? What if the FMV at 1/1/12 is less than the original cost of that fund--must I still use the higher amount?

3) If we dispose of these PFIC's in 2013 to get out of this draconian taxation, any and all gains would still be treated as ordinary income, in spite of the holding periods? Would the cost basis be the FMV at 12/31/12 that was used for the mark-to-market calculation?

4) What about the dividends received from the PFIC funds during 2012? The funds he holds distributes all income annually. Looks like dividends are included in ordinary income, no preferential rate for qualified dividends? Is there any requirement to adjust the FMV calculation for dividends received?
Submitted: 1 year ago.
Category: Tax
Expert:  Robin D. replied 1 year ago.

Robin D :

Hello and thank you for using Just Answer,
1) Is there an exemption or grace period under which a new Green card holder can dispose of these investments, without the substantial and adverse tax consequences? Unfortunately no. I know it does seem unfair but when one becomes a resident alien they are subject to US tax.
2) As I understand it Yes, your understanding is correct on this issue.
3) The FMV would be the 12/31/12 amount
4) What about the dividends Yes, they will not be allowed the advantage as qualified dividends.

Robin D :

You seem to have a very good understanding on this issue and although it is commendable that you seek relief for your son-in-law you have not missed anything and his taxation, though unfair, is not going to be less.

Customer:

Hi Robin-

Robin D :

Hello

Customer:

Hi Robin-I am a CPA and I was hoping for expert information from someone with qualifications in international taxation and a complicated area such as this one is

Customer:

you did not answer many of my questions

Customer:

What if the FMV at 1/1/12 is less than the original cost of that fund--must I still use the higher amount?

Robin D :

I thought (from your question) you had more knowledge than the average person.

Customer:

If we dispose of these PFIC's in 2013 to get out of this draconian taxation, any and all gains would still be treated as ordinary income, in spite of the holding periods?

Customer:

Is there any requirement to adjust the FMV calculation for dividends received?

Robin D :

By your rating of nonsatisfaction supplied, I will be happy to let someone else assist you.

Customer:

I would appreciate being referred to another expert if you do not have substantial experience with the Form 8621 and tax treatment of PFIC's

Robin D :

I do but it will be my pleasure to place your question back in the list so perhaps you can converse with another CPA and have an experience with Just Answer you are more happy with.

Robin D :

Pleas edo not respond to me as that will delay.

Expert:  Lane replied 1 year ago.

HI, You need to read one more article, from the AICPA journal (Your questions can't be answered without more specifics but, I believe that if you read this short article all of your questions will be answered, as you apply the facts.

First, let me bottom-line it for you:

Generally, Because of restrictions on the use of the mark-to-market method, the QEF (Qualified Electing Fund) election is the more favorable approach for most taxpayers ... preferably elected in the year the investment is made or as soon as possible thereafter to begin the running of the holding period for a subsequent sale.

To make the initial QEF election you have to file Form 8621 with his or her tax return and check the “Election to Treat the PFIC as a QEF” box. Since this tax year is not the year in which the investment was first purchased, you'll also check the “Deemed Sale Election” box on Form 8621. The QEF election is revocable only with the IRS’s consent.

And remember that you'll need to file each year thereafter AND file a separate copy of Form 8621 for each QEF asset (a fund, a pooled investment, or for EACH individual security).

As you read the article pay particular attention the "cleansing the investment's cleanse the asset’s PFIC taint."

You may find that using this to slowly unwind rather than simply liquidating may be an option.

Here's the article: http://www.aicpa.org/publications/taxadviser/2012/october/pages/clinic-story-07.aspx

Lane
Customer: replied 1 year ago.

Thank you for the referral to this article. My first objective was to try to get all of the PFIC's under the QEF rules for the 8621 reporting purposes. However, all of the PFIC's were put into his account well before he was in the US and certainly before he met the presence test and then got his green card in December 2012. I have looked up most of the prospectuses and they were all sold "not suitable for US investors"--and that is because they do not and will not provide a "PFIC Annual Information Statement" which is the requirement of being able to use the QEF Election. Besides the huge tax consequences, it seems patently unfair that there was really no way to avoid this since the FMV valuation date goes back to 01/01/12--before he would have even known that he would be subject to US taxes in the first place. So it seems that Green Card folks with money get clobbered. In any event--I need to move forward on the premise of the mark-to -market I presume? Thanks in advance for your response--we are not talking about insignificant amounts of money. Thanks in advance for your assistance. XXXXX XXXXXska

Expert:  Lane replied 1 year ago.

Yes, Donna.

Given your (mentioned above) constraints that will be the least of the evils.

And I agree .. not sure I understand the policy there.

Lane
Customer: replied 1 year ago.

So my original questions are still not fully answered.

Expert:  Lane replied 1 year ago.

1) Is there an exemption or grace period under which a new Green card holder can dispose of these investments, without the substantial and adverse tax consequences? To include this in ordinary income seems extraordinarily unfair.

There are no exemptions for new green card holders




2) As I understand it, if he elects mark-to-market on the Form 8621, we would need to determine the FMV of each of the funds at 1/1/12 and 12/31/12 and include that difference as ordinary income for 2012? What if the FMV at 1/1/12 is less than the original cost of that fund--must I still use the higher amount?

Sorry his adjusted cost basis would be the fair market value as of Jan 1st. The way IRC 1296 works is that you cannot take a loss in excess of any gains already taken, unless you have disposed of the stock. So if in the first year you have a loss, it cannot be taken for tax purposes as you have not recognized any gain (i.e. providing no 1296 basis). Once you recognized gain for the particular PFIC you can take a loss up to the gain prior to disposition.



3) If we dispose of these PFIC's in 2013 to get out of this draconian taxation, any and all gains would still be treated as ordinary income, in spite of the holding periods?

Yes, it will.

Would the cost basis be the FMV at 12/31/12 that was used for the mark-to-market calculation?

Ahhh finally some good news, Yes it will.




4) What about the dividends Yes, they will not be allowed the advantage as qualified dividends, and if the funds are REQUIRED to distribute, the FMV on 12/31 will have been adjusted for that.




Also, remember that all of the PFIC 1296 MTM will be netted together to arrive at a total PFIC income.

And finally, the foreign tax credits would still be available against the foreign sourced passive income (PFIC income in this case).


Customer: replied 1 year ago.

I don't understand your answer to 4)--if the funds have paid dividends, what kind adjustment do I have to make? If the fund pays dividends, do I have to pick up the dividends as ordinary income AND the change in FMV as ordinary. Do I still have to file Form 8621 if a fund paid dividends--pretty unclear. I have gone to the Code, still not clear.


CFR sec 1296 has an example where, upon sale, you do have to


compute the change in FMV AND long term capital gain from the original basis.


 


His investments are in Sterling--can I calculate the change in value in Sterling and then convert to US$ or do I have to convert to dollars at 01/01/12 rate and convert to dollars at 12/31/12 to calculate the change in FMV. If I do the latter, I am also paying tax on the change in currency during the period--in this case, increases the taxable amount. Does not seem to be any guidance other than change in FMV.


 


Thanks.

Expert:  Lane replied 1 year ago.
I don't understand your answer to 4)--if the funds have paid dividends, what kind adjustment do I have to make? If the fund pays dividends, do I have to pick up the dividends as ordinary income AND the change in FMV as ordinary. Do I still have to file Form 8621 if a fund paid dividends--pretty unclear. I have gone to the Code, still not clear.

Any necessary share price change from reinvested dividends will have been made for you, and be reflected in that total value amount in the statement.

When using MTM, you just use the total market value that on the statement for those proscribed dates.



His investments are in Sterling--can I calculate the change in value in Sterling and then convert to US$ or do I have to convert to dollars at 01/01/12 rate and convert to dollars at 12/31/12 to calculate the change in FMV. If I do the latter, I am also paying tax on the change in currency during the period--in this case, increases the taxable amount. Does not seem to be any guidance other than change in FMV.

 

IRS provides guidance on that here: http://www.irs.gov/Individuals/International-Taxpayers/Foreign-Currency-and-Currency-Exchange-Rates

 

IRS says the following:

"You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.

You must make all federal income tax determinations in your functional currency. The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). A QBU is a separate and clearly identified unit of a trade or business that maintains separate books and records."

Lane

 

 

Customer: replied 1 year ago.


Thank you for the IRS guidance--


 


"If your functional currency is not the US dollar, make all income tax determinations in your functional currency. At the end of the year, translate the results, such as income or loss, in to US dollars to report on your tax return"--that is the authoritative support I was looking for.


 


Re: the dividend question:


 


- If the fund pays dividends, do I have to pick up the dividends as ordinary income AND the change in FMV as ordinary? Not answered.


 


-If a fund pays dividends--do I still need to File a Form 8621 for that fund?


 


Thanks.


 


 

Expert:  Lane replied 1 year ago.

- If the fund pays dividends, do I have to pick up the dividends as ordinary income AND the change in FMV as ordinary?

 

No, as I said before, the fair market value at the end , in TOTAL ACCOUNT VALUE is all you need,,, the dividends will already be picked up as a part of that.

.

Do not make any changes from what you see on the statement as Total investment value at the end of the tax year.

 

 

 


-If a fund pays dividends--do I still need to File a Form 8621 for that fund?

 

Yes, you must use the 8621 to elect the Mark to Market method: See part II, box C

 

 

 

Lane

 

Customer: replied 1 year ago.


Thanks for your assistance and information.

Expert:  Lane replied 1 year ago.


You're welcome.


Positive feedback is appreciated, as it is the only way I will be paid for my time.

Thank You

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3857
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 5 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thank You.

If you would like to ask for me again just say "For Lane only," at the beginning of your next question.

Thanks again,
Lane

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