Example 1: B, who is a U.K. citizen, bought 100 shares of a U.K. unit trust on Jan. 1, 2006. He became a U.S. resident alien on July 1, 2009, and sold the shares on April 30, 2012. His total holding period is 2,311 days. The 100 shares cost £10 each, and he sold them for £20 each. What are the U.S. tax consequences of the sale?
The issues to consider are:
Therefore, the total gain on the sale of B’s 100 shares in the U.K. unit trust is $1,529.
Now the question becomes whether all this gain is taxed as an excess distribution as if the unit trust shares were PFIC stock from the date of acquisition. Under the excess distribution rules, once the excess distribution gain has been determined, it is allocated ratably to all the days in the investor’s holding period, in this case, Jan. 1, 2006, to April 30, 2012. However, this can result in an allocation to three distinct periods: (1) the pre-PFIC period—the period that the investor held the stock before it became a PFIC stock; (2) the current-year period—the days in the investor’s tax year when the excess distribution occurred, i.e., Jan. 1, 2012, to April 30, 2012; and (3) the prior-year PFIC period—the days in the investor’s prior tax periods during which the foreign corporation was a PFIC.
So the issue then becomes how to split the excess distribution gain among these three periods. Based on the fact that B’s unit trust shares under U.S. law would have been PFIC shares from the date of acquisition, it would appear that all the PFIC gain, except for the amount allocated to 2012, would be prior-year PFIC period and subject to the highest rate of tax and an interest charge for each year the gain is allocated.
However, Regs. Sec. 1.1291-9(j)(1) provides that
a corporation will not be treated as a PFIC with respect to a shareholder for those days included in the shareholder’s holding period when the shareholder . . . was not a United States person within the meaning of section 7701(a)(30).
Since B did not become a U.S. resident until July 1, 2009, the excess distribution gain allocated to Jan. 1, 2006, to June 30, 2009, is pre-PFIC period, and the gain allocated to July 1, 2009, to Dec. 31, 2011, is prior-year PFIC period.
So how is the gain taxed? Per Sec. 1291(a)(1) and Prop. Regs. Sec. 1.1291-2(e)(2):
I'll opt out now, as you've asked for a CPA or international tax attorney. but reading the above may help
and Thanks--I actually printed that example a minute ago from the Tax Advisor "When Becoming a US Resident, Beware of PFIC Rules" Tax Clinic. Not sure it was case on point, no 8621 filed for 2009 and 2010
Thanks, XXXXX XXXXX found the information I needed from other sources. I am sorry to give you that rating because you were very helpful getting me towards the right answer (at least I think it is) on the MTM questions. Extremely complex and not insignificant penalties and aggravation if done wrong. Thanks again--AICPA and NJSCPA's helped.
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