PFIC with a loss

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Pauline
Posts: 13
Joined: Thu Apr 09, 2015 11:23 am

PFIC with a loss

Post by Pauline » Thu Apr 23, 2015 8:07 am

Hi,

I had a TFSA (mutual fund) in Canada with a total value of <$14k. I closed this account in 2014, the year I became a US resident. Considering the drop in the CAD compared to the USD, the USD value of the account at the time of disposition was less than the cost base of the mutual funds when I purchased them, and I had a loss of around $900.

1) I did not receive any distribution from the mutual funds in 2014.
2) There was a direct disposition (the whole account) but NO gain, just loss.
3) The TFSA was not a QEF or MTM, since 2014 as the first year I was considered a US resident and thus the first year the TFSA is considered a PFIC, and I never made the election.
4) I am not making any election in Part II since I closed the account.
5) The total value of PFICs I owned on the last day of 2014 was 0 (<$25,000). The combined value of the PFICs my husband and I owned during the year was less than the $50,000 threshhold.

Now, from what I understand from the instructions of form 8621:
I) I do not need to file this form for the distribution received from this TFSA, and
II) I cannot claim the loss anywhere.

Am I correct?

Thanks.

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Thu Apr 23, 2015 2:15 pm

Hi Pauline,

Just to be clear the TFSA is the account type, and the mutual fund in the TFSA is a PFIC. The TFSA is considered a foreign trust in most cases (requiring form 3520 and 3520A).

Now, on your PFIC question. If you sell a fund for a loss, and you have never made a M2M or QEF election, then the default regime applies. Unfortunately, there is no way to claim the loss under the default election. And you do have to file form 8621 because you sold shares.

I would suggest filing form 8621, make the mark-2-market election and then you might be able to claim some of all of the loss - depending on what the value was on Dec 31, 2013.

I hope this helps, best regards.
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MGeorge is neither an accounting nor taxation professional.

Pauline
Posts: 13
Joined: Thu Apr 09, 2015 11:23 am

Post by Pauline » Thu Apr 23, 2015 2:37 pm

Thank you for the reply MGeorge.

First, let me correct my post: in section (I) I wrote distribution, but I meant disposition. As I have stated I did not receive any distribution in 2014.

I have some questions about your reply:

1) (the most important question!) You said that I have to file 8621 because I sold shares. When I look at the instructions for form 8621, "Who must file", the only thing I see about sold shares is the second item which states that a US persons need to file this form if they "Recognize gain on a direct or indirect disposition of PFIC stocks".
I did dispose of my shares, but I did not have a gain. So I would really appreciate if you could tell me what section states that we should file this form when shares are sold?

2) From what I understood so far, mutual funds cannot be considered MTM in the first year of election. Since this is my first and last year (since I closed all my mutual funds), I don't see what the benefit of electing the MTM would be. Could you please be more specific?

Thanks so much!

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Thu Apr 23, 2015 3:06 pm

Hi Pauline,

Regarding your questions:

1. My mistake, if the disposition shows a loss, then that fact does not require you to file 8621. There may be other facts that could require 8621 - like if your holdings exceeded $25,000.

2. I don't understand this question. My understanding is that you can make the M2M election at any time, the first year you own the fund, or in a later year. The key thing is that if you owned the fund in 2013 and didn't make any election in 2013 (you weren't a US resident, so I assume this is the case) and then you make an election in 2014, the default (sec. 1291) regime applies from the first day you owned the fund until it is deemed disposed of on Dec. 31, 2013. Then the M2M applies from Jan 1 2014 until the end of the year, or when you sold the shares. If there was any loss from the beginning of 2014, until you sold the shares, you can claim this loss. THat is the only benefit of M2M in your case. It sounds like you shoult just keep it simple and not claim the loss. You never get any loss under section 1291.

Thanks for setting me straight on point 1!
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MGeorge is neither an accounting nor taxation professional.

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Thu Apr 23, 2015 3:31 pm

Hi Pauline,

I can not find where I read that one can not claim a loss on a Sec. 1291 PFIC. Form 8621 seems to suggest that the loss just dies on line 15f of part 5, but I haven't found any reference that states that one could not just claim the loss on schedule D.

I haven't come across this in my own situation. Maybe some else has some input here?

I think what we have figured out is that you are not required to file form 8621 for your case. I hope the $900 loss is not "lost". Anyone out there know?
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MGeorge is neither an accounting nor taxation professional.

Pauline
Posts: 13
Joined: Thu Apr 09, 2015 11:23 am

Post by Pauline » Thu Apr 23, 2015 8:48 pm

Thank you again!

I think I cannot claim the loss either.

Unfortunately, I also think that I have to file form 8621.
In my first post I have shown that my case does not fall under any of the 5 circumstances stated for filing this form.
HOWEVER, another section states: "In general, the following interest holders must file Form 8621, unless an exception applies:
- A U.S. person that is considered (under sections 671 through 679) the shareholder of PFIC stock held in trust."

I cannot find an exception so I guess I have to file it.

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Fri Apr 24, 2015 8:36 am

Hi Pauline,

Ah details! Yes, I guess it is held in a trust. The good news though is that you only have to fill out parts I and V, which sounds like would be all $0 until line 15f where you put your loss, and that's it. Line 16a-f + the statement is really rough - and you don't have to complete any of it which is great.

I'll see if I can find any clarifications for claiming a schedule D loss for a PFIC for which no election was made (1291). I'll let you know if I find anything. The reason I think it might be allowed, is because, a number of times I have had a loss for M2M elected PFICs, and any total loss from a final sale is allowed on schedule D. My TaxACT software puts it there. It doesn't do this for 1291 losses though - but maybe that was a programming oversight. I will add to this thread if I find anything.


Best Regards.
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MGeorge is neither an accounting nor taxation professional.

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Fri Apr 24, 2015 9:21 am

Hi Pauline,

Me again. Good news, I think I have something. Read this link here:

http://intltax.typepad.com/intltax_blog/pfics/

The text following the bold text states that losses from the sale of a section 1291 are recognized as any other disposition of a stock. Recognizing the loss is under code 1001 - it seems to contradict section 1291.

I'd say print out this page for your files and future reference if you need it, file your return with 8621 completed, show your loss on line 15f of 8621 and then claim your capital loss on schedule D as if it was any other loss from the sale of a stock.

Cheers.
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MGeorge is neither an accounting nor taxation professional.

Pauline
Posts: 13
Joined: Thu Apr 09, 2015 11:23 am

Post by Pauline » Mon May 11, 2015 3:19 pm

Thank you so much MGeorge!
I really appreciate your reply.

I don't know why I was not notified that there was a reply to this post. I just saw your answer yesterday, and I decided to do some more research before replying.

From the explanation in the site that you referred to, one should be able to account for capital losses from a PFIC.

However, I found the following in the US revenue code:

"26 U.S. Code § 1211 - Limitation on capital losses
(a) Corporations
In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges."

I think that the PFIC is considered a corporation. Is this correct?
If it is correct, it is not possible to account for losses in the first year, since I did not have any gains in previous years.

I would appreciate if you tell me what you think about it.
Thanks.

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Mon May 11, 2015 4:47 pm

Hi Pauline,

I think section 1211 is only talking about the gains and loss that corporations can claim on a corporate tax return. I don't believe this applies to individuals.

What we know about a section 1291 PFIC, is that the loss that may occur from selling shares of a PFIC at a loss, are not treated by section 1291 of the code. The recognition of a loss would have to be covered under another code section such as 1001 - where it is. This allows the law makers to change section 1001 in the future if they wanted to deny the loss from the disposition of certain assets.

We see another example of this in the case of section 1296 - mark to market PFICs. If you sell at a loss that exceeds the amount of previously reported gains (under mark-to-market treatment), the extent that loss is not covered or recognized under section 1296 of the code. It does say though that the loss may be claimed under other provisions of the code - again similar language. And in this case - this loss is reported on schedule D.

In your case, I think you can just claim the capital loss on schedule D, and put zeros on form 8621.

In the US - aren't US domiciled mutual funds also considered corporations or RICs (Regulated Investment company)? You can certainly claim a loss from disposition of any US mutual fund or ETF.

I should say I'm relying on the reference to code 1001 from the article, I haven't managed to get a hold of it anywhere - but I believe the article says that code 1001 even mentions section 1291 funds.

I hope this helps - and I hope you claim your loss!
Best Regards.
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MGeorge is neither an accounting nor taxation professional.

Pauline
Posts: 13
Joined: Thu Apr 09, 2015 11:23 am

Post by Pauline » Tue May 12, 2015 11:51 am

Thank you for sharing your experience MGeorge.
Now that I've read your posts, everything makes sense.

Here is a link to the 1001: https://www.law.cornell.edu/uscode/text/26/1001
It does not mention 1291 funds. It only explains the general rules for calculating gains and losses. However, as the link you referred to mentions, the preamble to the Proposed Regulation clarifies that these stocks can be treated like any other stock, and thus follow the rules of section 1001.

I will consider the loss in schedule D.

Just to be sure if I am treating everything correctly: the date of US residency does not affect the holding period or the cost basis.

Thanks again.

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Post by MGeorge » Thu May 14, 2015 3:14 pm

Hi Pauline - it is my understanding that the cost basis and the holding period are not affect by your date of residency in the US. Thanks for the link to code section 1001.
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MGeorge is neither an accounting nor taxation professional.

Pauline
Posts: 13
Joined: Thu Apr 09, 2015 11:23 am

Post by Pauline » Thu May 14, 2015 5:44 pm

Thank you MGeorge!

Np8
Posts: 1
Joined: Tue Mar 05, 2019 7:42 pm

Re: PFIC with a loss

Post by Np8 » Tue Mar 05, 2019 8:19 pm

Hi I had around 1300$ gain last year in PFIC or in form 8621 . This year I have loss of 850$ And I can claim that as an ordinary loss but I don’t find any form to claim that loss. Can you please help me with how to claim 850$ as ordinary loss

Thank you for your time

MGeorge
Posts: 299
Joined: Fri Jun 22, 2012 9:23 am
Location: Canada

Re: PFIC with a loss

Post by MGeorge » Mon Mar 11, 2019 3:42 pm

Did you have a mark-to-market election in effect when you reported the $1,350 gain? If so, then you can report the $850 as a mark-to-market loss reported on line 20 (or 21?) "other income". It would just be a negative number on that line.

If the loss was from a sale with no mark-to-market election, then the result is different.
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MGeorge is neither an accounting nor taxation professional.

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