How JustAnswer Works:
  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.
Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 11822
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
Type Your Tax Question Here...
Lane is online now
A new question is answered every 9 seconds

What is the correct tax treatment for the sale of a foreign

Customer Question

What is the correct tax treatment for the sale of a foreign (non-US, would be treated as PFIC) fund, which was purchased BEFORE becoming a US resident and sold during the year that one becomes a Green Cardholder and US Resident for tax purposes? Specifically:

-Does a Mark-to-market (MTM) election and Form 8621 need to be made and filed for PFIC's that were sold during the year and before 12/31/12?

-If yes, what is the MTM valuation date? The date of disposition versus the 1/1/12 valuation?

-If MTM required and included on Form 8621 as ordinary income, does the remaining gain/loss get capital gain treatment and included on Sch D?

-The instructions refer to 1.1296(i--which refer back to rules of section 1291 which seems to specify the a disposition is to be treated as excess distributions under the Default Method. This stuff is ridiculously confusing.

Please use an example:
-Purchased XYZ Fund 100 GBP 1/15/10 (exchange = 1.6262)
-Move to USA and obtain Green Card 12/16/12, would also meet physical presence test
-Sell XYZ fund 10/31/12 at 200 GBP (exchange = 1.6133)
-exchange at 1/1/12 =1.5518
-exchange at 12/31/12=1.6244

And what if opposite, same fact as above but:
-purchase XYZ fund for 200 GBP
-sell XYZ fund for 100 GBP

Please respond only if you have substantial experience in this highly technical tax area--I prefer CPA or international tax attorney.

Submitted: 4 years ago.
Category: Tax
Expert:  Lane replied 4 years ago.

NPVAdvisor :

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:

  • Can B step up the basis in his stock to fair market value (FMV) as of the date he became a U.S. resident alien, which would then become its cost basis? No. Rev. Rul. 55-62 provides that no step-up in basis is permitted to the FMV of the asset as of the date that U.S. residency starts. The revenue ruling provides that the taxpayer is taxable on both pre-residency and post-residency gain in the United States when a taxable event occurs, e.g., a sale or exchange.

  • At what exchange rate is the original cost of the shares translated? For U.S. tax purposes, the exchange rate on the date of purchase is used (see Rev. Ruls. 54-105 and 78-281), i.e., $1.7234:£1 (midpoint rate on Jan. 1, 2006, per this online translator). So B’s 100 shares cost $1,723.

  • At what exchange rate is the sale price of the shares translated? As with the cost part of the calculation, the exchange rate on the date of the disposal is used, i.e., $1.6259:£1. So B’s 100 shares were disposed of for $3,252 (100 shares × £20 × 1.6259).

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):

  • The pre-PFIC period gain—$845 ($1,529 × [1,277 ÷ 2,311 days])—and current-year period gain—$80 ($1,529 × [121 ÷ 2,311 days])—are taxed as ordinary income on B’s 2012 U.S. tax return. Even though B’s stock may have otherwise qualified for the 15% dividend tax rate, the stock is a PFIC security that is not eligible for the 15% rate. Therefore, this income is taxed at whatever B’s marginal tax rate is for 2012.

  • The prior-year PFIC period gain—$604 ($1,529 × [914 ÷ 2,311 days])—is further allocated to the specific tax year in which it was deemed earned, i.e., 2009—$122; 2010—$241; and 2011—$241. B is then subjected to the highest rate of tax on these gains, irrespective of his actual marginal rate of tax during that year. Once the tax has been determined, it is subject to an interest charge.

NPVAdvisor :

I'll opt out now, as you've asked for a CPA or international tax attorney. but reading the above may help

Customer :

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

Customer :

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.

Expert:  Lindie-mod replied 4 years ago.


I’m Lindie, and I’m moderator for this topic. It seems the professional has left this conversation. This happens occasionally, and it's usually because the professional thinks that someone else might be a better match for your question. I've been working hard to find a new professional to assist you right away, but sometimes finding the right professional can take a little longer than expected.

I was checking to see if you had already found your answer or if you still needing assistance from another one of the professionals?

Please let me know if you wish to continue waiting or if you would like for us to close your question.

Also remember that JustAnswer has a multitude of categories to help you with all your needs from Health, Pets, Computers, Taxes, Cars, Finance, Law, to Home Improvement, and more.

Thank you,

Customer: replied 4 years ago.
Thanks for your follow up-- I think I was able to research this enough to get the information I needed-- I was really looking for concurrence with my positions, from someone who does this and knows it cold-- not someone who needed to research themselves.. On to my next dilemma with the 3520 and foreign trusts!