Global Tax Alert | 17 April 2014

US persons holding PFIC stock through tax-exempt organizations or accounts will be exempt from Form 8621 filing requirements

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In Notice 2014-28, the IRS announced that it will amend the definition of “shareholder” in the Section 1291 regulations to exempt US persons who indirectly own stock in “passive foreign investment companies” (PFICs) through certain tax-exempt accounts and entities from being required to file Form 8621 for those PFICs under Section 1298(f). The Notice covers PFICs owned by Individual retirement accounts (i.e., IRAs), individual retirement annuities, qualified pension and deferred compensation plans described in Sections 401(a), 403(b) or 457(b), tax-exempt entities (e.g., charities), religious and apostolic organizations, state colleges and universities, and qualified tuition programs, but not PFICs owned by charitable remainder trusts described in Section 664.

Background

Section 1298(f) and its temporary regulations require US persons who directly or indirectly own PFIC shares to report them annually on Form 8621. These rules are effective for tax years ending on or after December 2013 (and thus, apply to the 2013 calendar year). Under Section 6501(c)(8), the penalty for failing to file Form 8621 is that the statute of limitations on assessment for the entire return will never begin to run, unless the IRS is satisfied that the failure was due to reasonable cause and not willful neglect. (In that case, the statute of limitations would be suspended only for items related to the PFIC that was not reported.) See Tax Alert, US IRS issues final, temporary and proposed regulations on determining PFIC ownership and annual filing requirements for PFIC shareholders, dated 10 January 2014.

Notice 2014-28

In Notice 2014-28, the IRS stated that it would amend the regulations to provide that persons who own PFIC stock indirectly through certain tax-exempt entities and accounts are exempt from the new requirement to file Form 8621 under Section 1298(f). The exemption applies to PFIC stock owned through:

  • Individual retirement accounts and annuities (e.g., IRAs)
  • Pension and deferred compensation plans qualified under Sections 401(a), 403(b) or 457(b)
  • Qualified tuition programs described in Sections 529 or 530
  • Religious and apostolic organizations described in Section 501(d)
  • Tax-exempt entities described in Section 501(c), such as charities
  • State colleges and universities

The Notice does not contain any exemption for persons owning an interest in a PFIC through a charitable remainder trust described in Section 664.

More technically, the Notice stated that the regulations will be amended so that persons owning PFIC stock through such entities and accounts are not deemed to be indirect shareholders of the PFIC. According to the Notice, the application of the PFIC rules to a US person treated as owning stock of a PFIC through a tax-exempt organization or account is inconsistent with both the PFIC rules and the tax provisions applicable to tax-exempt organizations and accounts. As a result of this change, a US person owning PFIC stock through a tax-exempt organization or account will not be subject to the Section 1298(f) reporting rules. The IRS stated that the amended regulations will be effective for US persons owning PFIC stock through tax-exempts for tax years ending on or after 31 December 2013 (which is also the effective date of the temporary regulations under Section 1298(f)).

Implications

The Notice eliminates the confusion that had existed about whether people who owned PFIC stock through these tax-exempt entities and accounts were required to file Form 8621. A taxpayer’s indirect investment in a PFIC through such tax-deferred vehicles would not seem to defer tax on income that otherwise would be currently taxable.

The Notice provides for a sensible result because it means that US persons who own interests in PFICs through the above-enumerated, tax-exempt entities need not file Form 8621 when they hold an interest in tax-exempt vehicles that are already sanctioned by law to be tax-deferred or otherwise exempt from tax.

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC
  • Peg O’Connor
    +1 202 327 6229
    margaret.oconnor@ey.com
  • Matthew Stevens
    +1 202 327 6846
    matthew.stevens@ey.com
  • Petya Kirilova
    +1 202 327 6075
    petya.kirilova@ey.com
Ernst & Young LLP, International Tax Services, Boston
  • Matthew Blum
    +1 617 585 0340
    matt.blum@ey.com
Ernst & Young LLP, Exempt Organization Tax Services, Detroit
  • Michael P. Vecchioni
    +1 313 628 7455
    michael.vecchioni@ey.com
Ernst & Young LLP, Exempt Organization Tax Services, San Diego
  • Eva Gass
    +1 858 535 7327
    eva.gass@ey.com

EYG no. CM4364