PFIC (Form 8621) Filing Exception in Regulation vs Instructions

PFIC Form 8621 Filing Exception (Maybe)

When it comes to reporting certain Passive Foreign Investment Companies, such as holding companies and foreign mutual funds – the disclosure requirements are much more detailed than they are for other types of reporting on other International information reporting forms, such as Form 8938 (FATCA) or the FBAR (Foreign Bank and Financial Accounts). For example, when it comes to mutual funds, oftentimes Taxpayers will have to duplicate report the PFIC because the mutual fund disclosure is required to be reported both on the FBAR and again on Form 8621. A common question is whether or not there is an exception to filing form 8621. Sometimes, there may be an exception in a situation in which the US Person Taxpayer meets the $25,000/$50,000 exception. Based on the discrepancy between the instructions and the regulations, the results may vary.

$25,000/$50,000 General Exception to Form 8621 

The Form 8621 instructions provide the following:

Exception if aggregate value of shareholder’s PFIC stock is $25,000 or less

• • • A shareholder is not required to complete Part I with respect to a specific section 1291 fund if the shareholder meets the $25,000 exception on the last day of the shareholder’s tax year and the shareholder does not receive an excess distribution from, or recognize gain on the sale or disposition of the stock of, the section 1291 fund.

    • For purposes of determining whether a shareholder satisfies the $25,000 threshold, the shareholder takes into account all PFIC stock (QEFs, section 1291 funds, and PFIC stock subject to a section 1296 mark-to-market election) owned directly or indirectly other than PFIC stock owned through another U.S. person or PFIC stock owned through another PFIC.

    • Shareholders filing a joint return have a combined threshold of $50,000 instead of $25,000 for purposes of this exception.

On first glance, this paragraph would presume that as long as the Taxpayer did not receive any excess distributions, then as long as the total value of their PFIC does not exceed $25,000 or $50,000, then they would qualify for the PFIC reporting exception — and not have to file Part I. The problem is, that there is a preliminary section before reaching Part I, which requires certain information. This exception does not indicate that no form is required, but rather Part I is not required. The instructions then refer to the Regulation:

 Form 8621 and Regulation section 1.1298-1(c)(2)

 (2) Exception if aggregate value of shareholder’s PFIC stock is $25,000 or less, or value of shareholder’s indirect PFIC stock is $5,000 or less –

• General rule.

  1. 1. 1. A shareholder is not required under section 1298(f) and these regulations to file Form 8621 (or successor form) with respect to a section 1291 fund (as defined in § 1.1291-1(b)(2)(v)) for a shareholder’s taxable year if –

           1. (A) On the last day of the shareholder’s taxable year:

              1. The value of all PFIC stock owned directly or indirectly under section 1298(a) and § 1.1291-1(b)(8) by the shareholder is $25,000 or less; or
              2. The section 1291 fund stock is indirectly owned by the shareholder under section 1298(a)(2)(B) and § 1.1291-1(b)(8)(ii)(B), and the value of the section 1291 fund stock indirectly owned by the shareholder is $5,000 or less;

           2. (B) The shareholder is not treated as receiving an excess distribution (within the meaning of section 1291(b)) with respect to the section 1291 fund during the taxable year or as recognizing gain treated as an excess distribution under section 1291(a)(2) as the result of a disposition of the section 1291 fund during the taxable year; and

           3. (C) An election under section 1295 has not been made to treat the section 1291 fund as a qualified electing fund with respect to the shareholder.

Form 8621 if No Tax Return Required

So, while the Regulations may make it seem as if no Form 8621 is required, the instructions require it. The problem is further exacerbated by the fact that even when a taxpayer is not required to file a tax return, they are still required to file a form 8621 anyway:

• • • When and Where To File

      • Attach Form 8621 to the shareholder’s tax return (or, if applicable, partnership or exempt organization return) and file both by the due date, including extensions, of the return at the Internal Revenue Service Center where the tax return is required to be filed.

      • If you are not required to file an income tax return or other return for the tax year, file Form 8621 directly with the Internal Revenue Service.

When in Doubt, File the Form 8621

Thus, most experienced offshore tax law specialists would recommend your clients file Form 8621 in order to at least prevent the statute of limitation from remaining open indefinitely.

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