PFIC excess distribution of 125%. How to calculate?

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tony
Posts: 90
Joined: Tue Oct 18, 2016 8:50 pm

PFIC excess distribution of 125%. How to calculate?

Post by tony » Thu May 17, 2018 10:16 am

Questions about this example below:

1. It looks like this example ignores 125% excess distribution calculation? This example assumes 10 years (5 years before US res + 5 years later) of $1000 per year.
2. Why is it the last year is not considered as punitive? Why only previous 4 years?


Consider the example of a Canadian taxpayer who becomes a US resident taxpayer on January 1, 2013. They enter the US with a Canadian mutual fund that they have owned since Dec 31, 2007 (5 years) and has an unrealized gain of $10,000 USD. If they decide to wait and not do anything and then 5 years later they sell the entire PFIC, and assuming the unrealized gain is still $10,000, the taxpayer now has to calculate the taxes under the 1291 rules and a portion of the prior appreciation is now subject to punitive taxation. Instead of -0- income and a $10,000 long term capital gain later- the taxpayer has $6000 in ordinary income ($5,000 of pre-PFIC gain taxed as ordinary income, $1,000 current year PFIC gain taxed as ordinary income and the remaining $4,000 of unrealized gain is allocated to the prior years it was a PFIC- generating $1537 in 1291 tax for the PFIC years onto which $136 interest will be added.

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