Tax obligations under a PFIC regime and Form 8621

Oct 20, 2014

We’ve seen the basics of tax obligations and PFIC taxation in post Passive Foreign Investment Companies (PFIC) and Canadian mutual funds, although truth be told, it applies to PFICs anywhere, now let’s dig in!

The scenario is that John Doe (SSN: 000-00-0000). He bought a share of the Safe Investment Inc, a PFIC on January 1, 2012, at 1,000 USD to be sold on April 15, 2014, for 1,100 USD, no other income (interest/dividends) from this investment.

Here we go:

Since we are in Excess Distribution world, we are filing the 2014 edition of form 8621, prior years 8621 were not needed as clarified by regulations T.D. 9650 & REG-140974-11, issued on December 30, 2013: One would not have to file form 8621 if 1) their investment in PFIC is less than $25,000 ($50,000 per couple if married-filing-jointly) and 2) they do not elect to be taxed under a PFIC regime (which is our case – excess distribution is the default)

The first section is the identification of the taxpayer – John Doe


The first section is the identification of the PFIC – Safe Investment Inc


The Employer Identification Number is most likely “Not Applicable” (unless the PFIC has an EIN).

The Reference ID Number can be pretty much anything alphanumeric up to 50 characters no space. Have fun here, but stay consistent when describing the PFIC in the future or in other forms calling for a Reference ID Number.

The tax year of the PFIC is most likely Jan 1 thru Dec 31 2014


Part I describes the shares

Question 3: 0

Question 4: (a) $0 – 50,000

Question 5: The amount included under 1291 is $100


Part II would be to make elections. Excess distribution being the default regime, no election is to be made. Part II would be left blank – It’s not November 😉

Part III would be left blank.  It would only apply if you had made a Qualified Electing Fund election.  Under the scenario we’re using here, we did not.

Part IV would be left blank.  It would only apply if you had made a Mark-to-Market election.  Again, under the scenario we’re using here, we did not. Dude, it’s not November, why do you keep on talking about elections 😉


Part V is where the computation of your tax takes place, let the fun begin!

Question 15a: That would be $100 (in our case, the distribution is the proceeds from the sale (in excess of basis), but that’s also where you would enter any dividend or interest you may receive from the PFIC)

Question 15b: That would be $0 (no dividend or interest was paid in prior years, they ask that to get the 125%, in this case all excess distribution (what normal people would call capital gains in this case) will be taxable since 125% of zero = zero)

Question 15c: That would be $0 (Told you it would be fun, so here you go, zero divided by three equals zero)

Question 15d: That would be $0 (The fun continues 0 X 1.25 = 0)

Question 15e: That would be $100

Question 15f: That would be $100 (Gain on the sale of the stock, an excess distribution under the PFIC regime)

Question 16a: See statement to attach to return Statement for 8621 – sec 1291 (the numbers in the following lines come from the Excel file – please refer to that file to see how they’re computed)

Question 16b: That would be $4.97 (see Excel file for details)

Question 16c: That would be $32.61 (see Excel file for details)

Question 16d: For this example, I’ll assume that we don’t have any foreign tax credit to use, which is a shame because I like FTC.

Question 16e: That would be $32.61

Question 16f: That would be $1.23

Part VI would be left blank. We did not (previously) make an election to extend the time to pay tax.

Now, the $4.97 is going to line 21 (“other income”) of 1040, which can then be offset by anything lot of stuff like the adjustment to AGI (educator’s expense, then the standard/itemized deductions, personal exemptions, FTC from other passive income…). Whereas the $32.61 +$1.23 = $33.84 would be reported as an additional tax and can not be offset by anything (other than FTC for tax paid for that specific PFIC transaction, which would have been line 16d).

This will then flow to 1040: The $32.61 of tax (section 1291 tax to be specific) goes to line 44, with “1291TAX” in the space provided. Line 16f (the $1.23) is interest charged for the net increase in tax, and flows to Line 60c, Form 1040, with the notation “1291INT”.

Also, remember that as the song goes “Once a PFIC, always a PFIC”. Not a song? Well, it was a song in my head.

So, if you invest in a biotech company at early stages for instance, well it will do research (R&D expenses), but all its income will come from interest/dividends from the cash/investments it set aside. Likewise, its balance sheet will be investments it has to fund the research = it’s a PFIC, and always will be (for you and for the shares you bought at early stages, other persons and shares bought after the patent was discovered, drugs were sold… would be treated differently, provided the corporation no longer meets the PFIC asset, not income tests)

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