Ch. 2 PFICs International Tax Issues

Transcription

1 Ch. 2 PFICs International Tax Issues

2 2011 U.S.A. The Romneys U.S. Grantor Trust 14 s PFIC PFIC Pages (of 379) for PFICs Normally reporting numbers under $10 and often zeros.

3 What is a PFIC? A PFIC is a foreign corporation that meets one of two tests: 1) 75% "passive" income, or ) 50% of assets produce passive income or are held for the production of passive income. 11 Ex: A Mutual Fund 12

4 No Minimum Ownership Requirement With Tiny Numbers Why Comply? If Form 8621 is willfully not filed then the statute of limitations on Form 1040 or 1120 is suspended. 15 And For

5 How are Required Annual Reporting 17 PFIC shareholders taxed? 18 Three Regimes: 1) IRC sec Fund 2) Qualified Electing Fund (QEF) 3) Mark to Market 19 Section Fund (Default Regime)

6 Shareholder taxed on distributions of earnings and stock sale gains. Definitions 22 Excess Distribution (1) Distributions in current year that are at least 125% percent more than the average distributions over a three year period; and (2) Sale Gain Nonexcess Distribution Total Distributions - Excess Distributions (Other than Sale Gain) = Nonexcess Distributions

7 Nonexcess Distributions Tax Treatment Ordinary dividend income to the extent of E&P (Form 1040, line 9a). Excess, if any, over E&P: First recovers basis tax free Excess over basis is capital gain 25 Excess Distributions Allocate to each day in the shareholder's holding period of the stock Ignore E&P Portion allocated to current year and pre-pfic years is ordinary income (other income)

8 The balance is taxed at the highest statutory rate for the year to which allocated PLUS INTEREST on the tax Romney IRC sec Fund U.S.A. The Romneys U.S. Grantor Trust 14 s PFIC PFIC17

9 No Election Romney Form 8621 Part IV 2-10 Sale Gain = Excess Distribution $17

10 Line 11a instructions Determine the taxation of the excess distribution on a separate sheet and attach it to Form 8621 The shares were acquired Dec. 14, 2010 and sold May 3, Total Days Held: 141 Total Days in 2011: 123 (87% = $15) Total Days in 2010: 18 (13% = $2) Tax: 35% x $2 = $1 Interest: 4% X $1 = $0 Sale Gain = Excess Distribution $17 Excess Distribution Allocated to CY $15 Tax on $2 at highest rate (35%) $1 Interest on Tax (.04 x 2) $0 Form 1040 Reporting of Tax For individuals, enter this amount on Form 1040 to the left of the line 44 entry space. Enter Sec next to the amount.

11 Form 1040 Reporting of Interest For individuals, enter the interest at the bottom right margin of Form 1040, page 1 and label it as Sec interest. Include this amount in your check

12 QEF Regime (best option) 2-3 Qualified Electing Fund (QEF) Include in income each year pro rata share of: 1)PFIC ordinary earnings, plus 2)PFIC net long-term capital gain. Sale gain is capital gain Romney QEF Election 47 48

13 x x Romney Form 8621 Part II Romney Form 8621 Part II Pro Rata Ordinary Earnings $1,051 Pro Rata Net Capital Gain $12,950 Distribution (all return of basis) $20,743 The PFIC was purchased and liquidated by the foreign partnership in 2011 Without QEF, $14,001 of income would all be a non-excess distribution of E&P taxed as ordinary income.

14 When is the QEF Election Made? Extended due date for filing shareholder s return for the first tax year to which the election will apply. Retroactive QEF Election? Deemed Sale Election to convert unpedigreed QEF to pedigreed QEF 2-4 x Purge Sec fund taint.

15 2-4 Mark to x Enter Gain or Loss In Part IV as Excess Distribution Market Regime Mark To Market Election PFIC stock must be marketable stock FMV > A.B. = Gross income A.B. > FMV = Ordinary loss to the extend of unreversed inclusions 2-4 Romney Mark to Market Election 2-13 Gain on stock sale is also ordinary. 60

16 x 61 Romney Form 8621 Part III x <$269> loss but <$14> allowed because only $14 of unreversed inclusions

17 Who Must File Form U.S. Persons who are direct or indirect shareholders of PFIC: U.S. citizens and residents U.S. C Corporations U.S. S Corporations U.S. s U.S. Estates U.S. Trusts (other than grantor) Direct Ownership: 2011 The Romneys United States Country U.S. Citizen.006% PFIC U.S.A. U.S. Grantor Trust 14 s

18 PFIC PFIC17 What if a U.S. Family Owned the s? U.S.A. The Romneys U.S. Grantor Trust U.S. Family 14 s PFIC PFIC17 The U.S. would file the PFIC Form 8621s.

19 The Romneys, as partners, would file Form 8621 if: 1) The partnership does not file Form ) Income from an IRC sec fund (the default). 3) The partnership makes a QEF election and the Romneys wish to defer payment of the tax. x x Wanda Chan Example In January 2011, Wanda invested about $10,000 ( %) in a foreign partnership that owns 12 PFICs Each PFIC reports $0, income, distributions, etc.

20 Filing Strategy File 12 separate Form 8621s. Make a QEF election for each. Report zeros in Form 8621 Part II. x If no prior QEF election, then make a deemed sale election

21 x Enter Gain or Loss In Part IV as Excess Distribution 2012 Required Annual Reporting 82 Excess Distribution Inclusion Inclusion or ded

22 Return to the Romneys 2-20 Is this 100% owned foreign corporation a PFIC? The Romneys Form 5471 Income Statement United States Country U.S. Grantor Trust 100% Corporation (Bermuda) Investments $13,000 At least 87% of gross income is passive Dividends...$16 Interest.$125 Net Capital Gain..$2,261 Other Income. $320 Total Income.$2,722

23 Form 5471 Balance Sheet Isn t Other Investments..$13,154 Sankaty a PFIC? 100% of assets are passive Form 5471 Sch I Other Lessons Subpart F Income.$2,722 CFC Reporting Trumps PFIC Reporting No Form 8621 is Required From the Romneys

24 Background Form 8938 And Instructions 94 Filing Threshold For Individuals (unless MFJ) FFA value: > $50,000 at year end or > $75,000 at any time during the year 96

25 MFJ Filing Threshold Value of SFFAs: (1)> $100,000 at Year End OR (2) $150,000 at any time during the year. Penalty for Failure to File Form 8938 $10,000 Minimum $50,000 Maximum 98 Specified Financial Assets (SFFAs) 99 1) Any financial accounts maintained by a foreign financial institution. 100

26 Mutual Funds (PFICs) are Financial Institutions Other Financial Assets ) Assets not held at a (U.S. or ) financial institution: a) Any stocks or securities issued by a foreign person; b) Any other investment financial instrument or contract issued by foreign person; 103 c) any interest in a foreign entity 104

27 Romney Form 8938 Willard M. Romney and Ann D. Romney x x 105 See Attached Statement

28 Attachment to Form 8938 Spreadsheet footnote: The highest capital account balance during the tax year was used as a reasonable estimate of maximum value based on readily accessible information Reg sec D-5T(a): Except as provided [otherwise] the value of a specified foreign financial asset is the asset's fair market value. Exceptions are provided for Trusts Estates Pension plans Deferred comp. plans. But not foreign phps

29 General FMV Relief in Temp. Reg. Preamble Even if there is no information from reliable financial information sources regarding the fair market value the regulations do not require a filers to obtain an appraisal by a third party in order to reasonably estimate the asset's fair market value , Ln8A $1,850, Ln9A 11, Ln8A $4,517, Ln13 1, Ln Ln30 B B B D E x 1 x 2 Include in value for filing threshold No Check in the Box for Form 8621?

30 Mutual Funds (PFICs) are Specified Financial Assets for purposes of Form All of the Romney s PFICs are owned through foreign partnerships and such SFFAs are not reported on Form 8938 by the U.S. partner 118 Each and every foreign partnership is an SFFA that is reported by the U.S. Partner on Form What if a U.S. Family Owned the Romney s? 120

31 Form The Romneys U.S. Grantor Trust In 2011, this U.S.A. U.S. Family structure eliminates 14 s Form 8938 Reporting In 2012, the U.S. family partnership must file Romney Form 8865s 2-19

32 Two 8865s Phps 2-20 To report cash transfers to foreign partnerships: $111,081 for a % Int. $296,471 for a.38280% Int. Romney Form Form 926 To report the Romneys $114,009 share of a partnership s cash transfer to a foreign corporation. Romney FBARs 128

33 FBAR X X Did the Romney s file an FBAR For 2011? NO FBAR s Filed. Error? Mutual Funds (PFICs) are Financial Institutions for FBAR reporting 131 All of the Romney s PFICs are owned through foreign partnerships and they do not own more than 50% of any foreign php. 132

34 They do own 100% of a foreign corporation (Sankaty), but it must NOT own an FFA over $10, What reporting would be required if the Romney s directly owned.00001% of a foreign mutual fund worth $10,500? 134 Direct Ownership: Specified Person Form PFIC United States Country.00001% Mutual Fund $10,500 Form 8938 with the box checked for Form TD F FBAR

35 IRS Website Q&As on Form IRS Guidance On Reporting Of Specified Financial Assets -- Full Text real estate is not a specified foreign financial asset required to be reported on Form If the real estate is held through a foreign entity, such as a corporation, partnership, [nongrantor] trust or estate, then the interest in the entity is an SFFA.

36 Directly held tangible assets, such as art, antiques, jewelry, cars and other collectibles, are not SFFAs. Directly held precious metals, such as gold, are not specified foreign financial assets. Gold certificates issued by a foreign person are SFFAs. Question: This tax year I sold precious metals that I held for investment to a foreign person. Do I have to report the sales contract on Form 8938? Form 8938 SFFAs include: Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.

37 Answer: The contract with the foreign person to sell assets held for investment is an SFFA. Report if the reporting threshold is exceeded. A safe deposit box is not a financial account. Question: How do I value my interest in a foreign pension or deferred compensation plan for purposes of reporting this on Form 8938? Answer: (1) Use FMV (2) IF FMV is unknown, then use amount of cash or property distributed.

38 2-25 3) If no distributions and FMV is unknown, then value at zero. Lets hope they allow something similar with PFICs Comparison of Form 8938 and TD F (FBAR) Requirements IRS Website FBAR 2-29 FinCEN Notice (Feb. 14, 2012) FBAR Filing Extension To June 30, 2013 For Certain Individuals

39 Narrow relief for public companies where the executive of the parent company has signature authority over accounts of a subsidiary or vice versa. FinCEN Announcement Feb 24, 2012 Mandatory E-Filing For FBARS Delayed until July 1,

40 Internal Revenue Manual Provisions Addressing FBAR Penalties IRM on FBAR Civil Penalties and Mitigation Guidelines 2-30 FBAR civil penalties have varying upper limits, but no floor. The examiner has discretion in determining the amount of the penalty, if any. Examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation. Penalties should be asserted only to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future. Mitigation Guideline Examples Nonwillful violation with maximum balance under $50K Penalty: $500 per violation/max. $5,000

41 Willful violation with maximum balance over $1 million Penalty: the greater of (a) $100,000 or (b) 50% of the balance in the account at year end U.S. v. Williams (Fourth Cir. 07/20/2012) Failure To File FBARs on Accounts is Willful 2-36 CCA Estate Liable For Decedent's Trust Reporting Penalties PLR (11/9/12) Mexican Land Trust (fideicomiso) is Not a Trust for U.S. Tax Purposes

42 The sole purpose of the Mexican Landholding Trust is to satisfy the Mexican Federal Constitution by vesting legal title to the property in the name of the trustee Rev. Rul applied similar logic to an Illinois Land Trust IR (6/26/2012) Offshore Voluntary Disclosure Program (OVDP) Announcement 2009 and 2011 OVDPs: $5 billion in back taxes, interest and penalties 33,000 voluntary disclosures 1,500 voluntary disclosures already in the 2012 program

43 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers IRS Website (Posted 06/26/2012) Selected FAQs 2-39 Unlike the 2009 and 2011 OVDPs: No set deadline for taxpayers to apply. Offshore penalty 27.5% (up from 25% in 2011 program) of the value of foreign assets for the disclosure period. Q&A 7- Program Requirements File amended returns and pay delinquent tax and interest. Extend S of L-- Title 26 and 31 Pay 20% accuracy penalty Failure to File Penalties Failure to Pay Penalties 27.5% Penalty on value foreign assets. Q&A 8 Example: $1,000,000 in a foreign bank account in $50,000 of omitted income from 2003 through OVDP: $518,000 plus interest

44 Without OVDP: About $4,543,000 ($3,825,000 FBAR penalties) Plus possible criminal prosecution Q&A How do I request pre-clearance before I submit my offshore voluntary disclosure? Submit certain information and IRS Criminal Investigation will notify the taxpayer whether or not they are cleared to make an offshore voluntary disclosure. Q&A Disclosure Period For calendar year taxpayers the voluntary disclosure period is the most recent eight tax years for which the due date has already passed. (Ex: 2004 through 2011) Q&A What about the Statute of Limitations? The taxpayer agrees to waive the statute in order to get the deal (27.5% penalty).

45 , the statute of limitations for asserting FBAR penalties is six years from the date of the violation, which would be the date that an unfiled FBAR was due to have been filed. 31 U.S.C. 5321(b)(1). Q&A Delinquent FBARs Only The IRS will not impose a penalty for the failure to file the delinquent FBARs if there are no underreported tax liabilities and you have not previously been contacted regarding an income tax examination or a request for delinquent returns. Q&A Delinquent Forms such as Forms 5471, 3520: The IRS will not impose a penalty for the failure to file the delinquent Forms 5471 and 3520 [presumably also Forms 8865 and 926] if there are no underreported tax liabilities and you have not previously been contacted Q&A Accounts with mere signature authority No need to include in foreign assets subject to 27.5% penalty. The taxpayer may cure the FBAR delinquency for the account the taxpayer does not own by filing the FBAR with an explanatory statement before being contacted

46 Q&A 47 I have a client who may be eligible to make a voluntary disclosure What are my responsibilities to my client under Circular 230? The IRS anticipates that taxpayers will seek qualified tax and legal advice and representation in connection with considering and making a voluntary disclosure. If a taxpayer seeks the advice of a tax practitioner, the practitioner must exercise due diligence in determining the correctness of any oral or written representations made to the client about the program and the implications for that taxpayer of going forward. If the taxpayer decides to proceed with the disclosure, the practitioner must exercise due diligence.

47 If the taxpayer decides not to make the voluntary disclosure despite the taxpayer s noncompliance with United States tax laws, Circular 230 requires the practitioner to advise the client of the fact of the client s noncompliance and the consequences of the client s noncompliance. A practitioner whose client declines to make full disclosure of the existence of, or any taxable income from, a foreign financial account during a taxable year, may not prepare the client's income tax return for that year without being in violation of Circular 230. Q&A 50 Will examiners have any discretion to settle offshore voluntary disclosure cases? Examiners will compare the OVDP penalty NO regime with...

48 The tax, interest, and applicable penalties at their maximum levels for all open years in the absence of the OVDP penalty regime. The taxpayer will pay the lesser amount. The taxpayer may opt out 2-49 Q-51 Under what circumstances might a taxpayer consider opting out of the civil settlement structure of the OVDP? Q&A 51

49 An opt out is an election made by a taxpayer to have his or her case handled under the standard audit process. See Q51.1 Example 2 $200,000 FFA Balance Nonwillful FBAR violation $2,000 unreported interest income Civil Settlement Structure Income Tax Due $700 20% Accuracy penalty 27.5% Offshore Penalty Civil Fraud Penalty $140 $55,000 0 FBAR Penalty 0 Total $55, Opt out Civil Settlement Structure and 1 year nonwillful FBAR penalty Income Tax Due $700 $700 20% Accuracy penalty 27.5% Offshore Penalty Civil Fraud Penalty $140 $140 $55, FBAR Penalty 0 $10,000 Total $55,840 $10,840

50 2-52 IRM Mitigation guidelines say $5,000 max. FBAR penalty OVDP Q&A I have a Canadian registered retirement savings plan (RRSP), registered retirement income fund (RRIF), or other similar Canadian plan. I did not make a timely election pursuant to Article XVIII(7) of the U.S. Canada income tax treaty to defer U.S. income tax on income earned by the RRSP or RRIF Cannot Elect Treaty Relief Retroactively

51 The Form 8891 also eliminates Forms 3520 and 3520-A filing With OVDP: Q & A 54 provides a path to possibly getting a retroactive election for filing Form 8891 with zero income tax and zero OVDP penalty. If the election is granted, then the RRSP or RRIF balance is NOT included in the offshore penalty base. IRS Instructions and 2-61 Questionnaire for Streamlined Filing Compliance Procedures for Non-Filer U.S. Taxpayers residing outside U.S. (6/26/2012)

52 Aimed primarily at nonresident nonfilers of Forms 1040 and FBARs. Secondarily, relief for U.S. citizens residing in Canada, seeking late Form 8891 elections T.D. 9584, Reg , -5, -6, -8; (g)-1 (4/17/2012) Rev Proc (4/17/12) Bank Deposit Interest Reporting For Nonresident Aliens 2-64 The identification of a country as having an information exchange agreement with the U.S. does not automatically mean that the information collected will be reported to the foreign jurisdiction.

53 So far, the exchange is automatic only for Canada.