How is PFIC income taxed?

All capital gains from the sale of PFIC shares are treated as ordinary income for federal income tax purposes and thus are not taxed at preferential long-term capital gain rates (Sec. 1291(a)(1)(B)).

What is passive income for PFIC?

A passive foreign investment company (PFIC) is a corporation, located abroad, which exhibits either one of two conditions, based on either income or assets: At least 75% of the corporation’s gross income is “passive”—that is, derived investments or other sources not related to regular business operations.

Is PFIC income ordinary?

The portions allocated to the days in the current tax year and the shareholder’s tax years in its holding period before the foreign corporation qualified as a PFIC (pre-PFIC years) are taxed as ordinary income.

Is PFIC income taxable in California?

No income is reported in the current years unless an actual distribution is made by the PFIC or the stock is sold. The remaining gain, allocated to PFIC taxable years, except for the current taxable year, is Page 10 subject to a deferred tax. (IRC §1291.)

How are gains taxed under the PFIC rules?

The amount of the recognized gain is equal to the asset’s fair market value as of the first day of the PFIC’s first tax year, less its adjusted basis. The gain is taxed at ordinary income tax rates, according to the excess-distribution regime, and is subject to Sec. 6621 interest charges.

How to file a tax return for hodgenlaw PC?

You will be filing Form 8621 along with your tax return. Here is how you do it: First, fill in the top part of Form 8621, page 1. This is where you put your name and address and all that fun stuff. Second, in Part I, don’t do anything. You are doing a simple sale of the PFIC stock using the default rules.

What makes a foreign holding company a PFIC?

More than 50 percent of: is owned (within the meaning of section 958 (a)), or is considered as owned by applying the rules of ownership of section 958 (b), by United States shareholders on any day during the taxable year of such foreign corporation.

How is a PFIC defined under Sec 1297?

Under Sec. 1297, a PFIC is defined as a foreign corporation that meets at least one of the following tests: 50% or more of the average fair market value of the assets it held during the year are passive income-producing assets (the asset test).