Chapter 15
International Tax
and Foreign
Financial Asset
Reporting
1
Update
PFIC Temp.
(and Prop.)
Regulations
(Dec. 31, 2013)
2
What is
a PFIC?
3
A PFIC is a foreign
corporation that meets
one of two tests:
1) 75% "passive"
income, or
4
2) 50% of assets
produce passive
income or are
held for the
production of
passive income.
5
Ex:
A Foreign
Mutual Fund
6
No Minimum
Ownership
Requirement
7
How are
PFIC
shareholders
taxed?
8
Three Regimes:
1) IRC sec. 1291 Fund
2) Qualified Electing
Fund (QEF)
3) Mark to Market
9
The Romneys
2011
U.S. Grantor Trust
U.S.A.
Foreign
14
Foreign
Foreign
Foreign
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
Foreign
Partnerships
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
Foreign
Partnership
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC
PFIC17
PFIC
233 Pages (of 379) for PFICs
Normally reporting numbers
under $10 and often zeros.
With such Tiny
Numbers Why
Comply?
13
If Form 8621 is
not filed,
then the statute of
limitations on Form
1040 or 1120
remains open
(until 8621 is filed + 3 years-IRC sec. 6501(c)(8))
14
General Rule:
Update
A U.S. person that is
shareholder of a PFIC
must file Form 8621
(or successor form)
Separate Form 8621 for Each PFIC
15
Update
For a tax year of the U.S.
person ending
on or after
Dec. 31, 2013
=
All 2013 Calendar
Year Returns
16
Update
No annual filing
requirement for TYBB
12/31/2013
(contrary to suspension
threat in
Notice 2011-55)
17
Draft Form 8621
Update
18
Part 1: “Reserved for Future Use”
Draft
19
Filing Exception
Update
A PFIC in which the shareholder
is only subject to tax under
Sec. 1291
(NO QEF of MTM Election)
but no excess distributions or
gains
and either
20
Update
A) aggregate value of
all PFIC stock owned
at year end > $25,000
($50,000 for MFJ)
21
Update
Shareholders must take
into account all PFIC
stock owned directly or
indirectly except for
PFIC stock owned
through another U.S.
person that itself is a
shareholder of the PFIC.
22
Update
or
B) the PFIC stock is owned
through another PFIC, and
the value of the
shareholder's proportionate
share of the upper-tier
PFIC's interest in the lowertier PFIC does not exceed
$5,000. (Reg. §1.1298-1T(c)(2)(i))
23
Update
FMV? Shareholders
may rely upon periodic
account statements
provided at least
annually to determine
the value of the PFIC.
24
Update
Attach Form 8621 to
federal income tax
return
(or, if applicable,
partnership or exempt
organization return)
25
Example
In January 2013, Wanda
invested about $10,000
(.000264%) in a foreign
partnership that owns 12
PFICs.
Each PFIC reports $0, income,
distributions, etc.
Suggested
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
x
Enter Gain or Loss
In Part IV
as
Excess Distribution
Make the Reg. sec.
1.1411-10(g) Election
to match net
investment income
with Chapter 1
income for the PFIC
QEF.
Draft
35
36
Notice 2013-10
(Jan. 23, 2013)
15-1
IRS Defers Start Date For
Form 8938 Filing By
Specified Domestic
Entities to 2013 At The
Earliest
37
FBARS Must Be Filed Electronically
38
FBAR Filing Authorization Form
39
Check-the-Box For Late Filing Reason
40
Taxpayer X exercised
ordinary business
care and prudence,
but was was unable
to comply due to the
following reasonable
cause:
Circumstances Beyond Taxpayer’s Control.
“Consider whether or not the taxpayer could
have anticipated the event that caused the
noncompliance. Reasonable cause is
generally established when the taxpayer
exercises ordinary business care and
prudence, but, due to circumstances beyond
the taxpayer’s control, the taxpayer was
unable to timely meet the tax obligation.”
Rev Rul 2013-14
(June 24, 2013)
15-2
Mexican Land Trusts Are
Not Trusts For U.S. Tax
Purposes
46
15-4
National Taxpayer
Advocate (NTA) 2012
Report to Congress
NTA Report Criticizes IRS
OVDI For Discouraging
Voluntary Compliance
47
15-8
GAO Report on Offshore
Disclosures
(March 2013)
IRS Has Collected Billions
of Dollars, but May Be
Missing Continued
Evasion
48
Steven
Michael
Rubenstein
$80,000
Cayman
Islands
Account
Unreported
Interest & No
FBARs:
$2,000 in 2010
$2,000 in 2011
$2,000 in 2012
In re Grand Jury
Proceedings
(11 Cir. 2/7/2013)
15-2
Required Records
Doctrine Trumps 5th
Amendment Rights For
Foreign Bank Records
53
Thomas v. UBS
th
(7 Cir. 02/07/13)
15-3
Seventh Circuit Soundly
Rejects Former UBS
Clients' Suit To Recover
Penalties
54
15-3
“The plaintiffs, and the other members
of the class—who number in the
thousands—are American citizens who
had bank accounts in UBS in 2008
when the UBS tax-evasion scandal (of
which more shortly) broke. The
accounts of the three plaintiffs were
large—$500,000 to $2 million each.
The plaintiffs had not disclosed the
existence of the accounts on their
federal income tax returns, as they
were required to do by Form 1040,
Schedule B, …”
55
15-3
“They also did not disclose the income
they earned in those accounts. Neither
did they pay federal income tax on that
income, though it was taxable.
Eventually they ‘fessed up and paid the
taxes they owed plus interest on those
taxes and a 20 percent penalty. They
did this pursuant to an IRS amnesty
program, adopted in the wake of the
scandal, called the “Offshore Voluntary
Disclosure Program.”
56
15-3
“The plaintiffs are tax
cheats, and it is very odd, to
say the least, for tax cheats
to seek to recover their
penalties … from the source,
in this case UBS, of the
income concealed from the
IRS.”
57
15-4
“…our plaintiffs do not argue that
they … received tax advice from
UBS. They argue rather that the
bank should have prevented them
from violating the law. This is like
suing one’s parents to recover tax
penalties one has paid, on the
ground that the parents had failed
to bring one up to be an honest
person who would not evade taxes
and so would not subject himself to
58
15-4
“…a bank is not a fiduciary of
its depositors. It is merely a
creditor. [Citations omitted] It
has no duty to treat them like
children or illiterates, and thus
remind them that they have to
pay taxes on the income on
their deposits. It has no duty to
read aloud to them line 7a on
Schedule B of Form 1040.”
59
15-4
“We needn’t discuss the
plaintiffs’ remaining claims—of
negligence and malpractice—as
they are frivolous squared.
This lawsuit, including the
appeal, is a travesty. We are
surprised that UBS hasn’t asked
for the imposition of sanctions
on the plaintiffs and class
counsel.”
60
15-9
Sergio Garcia
(TC March 14, 2013)
Pro Golfer's Endorsement
Income Reallocated As
65% Royalty, 35%
Personal Services
61