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K-1 - Passive foreign investment company (PFIC) (QEF) other…

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K-1 - Passive foreign investment...
K-1 - Passive foreign investment company (PFIC) (QEF) other income - Is PFIC income passive in the sense that its subject to 469 rules so that passive income can be offset against other entities passive losses and PFIC losses limited to PAL rules?
Submitted: 7 months ago.Category: Capital Gains and Losses
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12/5/2017
Tax Expert: Lane, JD, CFP, MBA, CRPS replied 7 months ago
Lane
Lane, JD, CFP, MBA, CRPS
Category: Capital Gains and Losses
Satisfied Customers: 14,614
Experience: Have been providing Financial and Tax advice for 30 years.Concentration in Corporations, Estate, Income Tax and Business Planning
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Hi. My name's Lane

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice 1986.

If you’ll please bear with me for a minute I’ll type up my initial response, and then we can go from there if you have further questions on this.

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Tax Expert: Lane, JD, CFP, MBA, CRPS replied 7 months ago

Yes, the rules under 469 overarch (the GENERAL rule) the PFIC and QEF rules. one place you see this made clear is in the instructions for 8969

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Customer reply replied 7 months ago
Is passive foreign investment income subject to PAL rules?
Tax Expert: Lane, JD, CFP, MBA, CRPS replied 7 months ago

If you take a look at section 1291, you'll see the (very detailed) rules about how to calculate tax on distributions from a PFIC, and you see that gains are treated as excess distributions from a PFIC. Section 1291 does not mention losses.

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It's just not as simple as that. Note that this proposed regulation doesn't specify which section of the Code can be used to recognize losses. So, any section of the Code will do, not just the PFIC sections.

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The GENERAL rules for losses recognized on a disposition of stock apply to losses realized and recognized on the disposition of stock of a section 1291 fund. IL-656-87

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So it's POSSIBLE that if the other rules don't disallow the PAL will, depending on the nature of the investment. The proposed regulations merely attempt to say that the PFIC rules do not specifically allow recognition of loss in a transaction that normally does not permit recognition of loss.

....
As an example, if a domestic trust becomes a foreign trust, loss is not recognized. Reg. §1.684-1(a)(2). The proposed regulations make it clear that the PFIC rules do not provide for recognition of losses in these kinds of things either.

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You must apply all PFIC rules first. Now, for the sale of a ETC, we can rely on the basic rules about gains and losses: The entire loss from a disposition is recognized under section 1001. IRC §1001(c).

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The PFIC rules do not specify whether the loss is ordinary or capital in nature, so we have to use the general rules for losses recognized on the sale of stock. if you simply hold an ETF as a personal investment, then it probably is a capital asset. IRC §1221. Thus, the loss is a capital loss.

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