Can PFIC Losses Offset PFIC Gains

Can PFIC Losses Offset PFIC Gains

Can PFIC Losses Offset PFIC Gains

The acronym PFIC refers to a Passive Foreign Investment Company. While technically, PFIC taxes are not penalties, for all intents and purposes it is essentially a penalty. That is because even if the income would otherwise be considered qualified dividends or long-term capital gain, it loses its character once it becomes PFIC. And any income from here PFIC that is considered excess distributions is taxed at the highest tax rate permissible,  in addition to interest for the amount of time that the income remained in the PFIC but was not taxed in prior years – noting, that there may not have been any excess distributions in prior years. One common question we receive is if you have income from one PFIC and losses from another PFIC in the same year, can they zero out? Presumably, the answer is no as detailed in the case of Toso.

Non-PFIC Capital Gains Example

To put the concept into context, let’s look at a non-PFIC example for a moment:

      • David sells $100,000 of stock in one year.

      • It is all long-term capital gain with $60,000 in gains and $40,000 in losses.

        • When it comes to preparing the tax return and reporting the income, the gains are offset by the losses — so in this example, David will be responsible for $20,000 of income which would be taxable as long-term capital gains (15% or 20%).

PFIC Example

With PFICs, the above concept does not apply. Rather, each PFIC is considered as its own separate scenario, so that each PFIC will be a taxable gain or a loss that would be not taxable — but one PFIC’s gains are not offset by the losses of another PFIC. Let’s take a look at the analysis:

26 USC 1291(a)(2)

(2) Dispositions

      • If the taxpayer disposes of stock in a passive foreign investment company, then the rules of paragraph (1) shall apply to any gain recognized on such disposition in the same manner as if such gain were an excess distribution.

Toso Court Holding

      • “We agree with respondent that section 1291 does not provide for the netting of gains and losses on dispositions of PFIC stock. Section 1291(a)(2) provides that the PFIC tax rules apply “to any gain recognized on such disposition [i.e., on a disposition of stock in a PFIC]”. The use of the singular, “any gain recognized on such disposition” (emphasis added), indicates that section 1291 applies to each disposition of PFIC stock separately, rather than to an annual aggregation of sales of multiple stocks.

      • Consequently, section 1291 applies to any disposition upon which gain is recognized. Section 1291 does not address, and therefore does not apply to, dispositions upon which losses are recognized. Accordingly, we conclude and hold that in applying the provisions of section 1291, petitioners are not entitled to offset gains from sales of PFIC stocks with losses from sales of PFIC stocks.”

What does this mean?

Essentially, the court takes the position that because the code section refers to the phraseology “any gain,” it presumes that if there is gain in one PFIC, that gain would apply to that specific PFIC whether or not there were other PFICs had losses. In other words, each PFIC must be looked at individually — and if there is gain in one PFIC then it would be taxable whether or not they would otherwise be losses to offset the PFIC gain from another PFIC.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the income tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

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