PFIC Form 8621 Part 1 Summary QEF election

[mabeau]

I purchased a PFIC in 2017 which provides a PFIC Annual Information Statement and for which I intend to make the QEF election this first year of ownership. I believe I have a decent understanding of what is required for the QEF election on Form 8621, except for Question 5 of the Part I Summary section. [ 5) Type of PFIC and amount of any excess distribution or gain treated as an excess distribution under section 1291, inclusion under section 1293, or inclusion or deduction under section 1296]

Let’s say I bought 100 shares 72 days into the year for simple math with the following:
Ordinary earnings (USD) – 0.0019465948  0.0019465948 x 293 x 100 = $57.04
Net capital gains (USD) – 0.0072609189  0.0072609189 x 293 x 100 = $212.75
Cash/property distributions (USD) – 0.718183  (0.718183/365) x 293 x 100 = $57.65

I elect Election A in Part II. I then enter $57.04 in box 6a and $212.75 in box 7a.

What is the inclusion under section 1293 in Question 5b of Part I? Should this be zero, $57.65 (the actual cash/property distributions) or $269.79 (the sum of the ordinary earnings and net capital gains)?

Is the actual cash/property distributions ignored in the 2017 taxes and only used for calculating adjusted basis upon sale of the ETF/fund?

I have found a lot of information on how to report Question 5 for a PFIC under the excess distribution regime, but not much clarity for if you make the QEF election in the first year without previous PFIC taint.

Thanks.

[whiterhino]

I actually have the same question about line 5. I also have PFIC acquired in 2017 and choosing to elect QEF.

My reading of IRC section 1293 is that we should include the total income from the PFIC here: ordinary income plus net capital gains.

“(a) Inclusion
(1) In general every United States person who owns (or is treated under section 1298(a) as owning) stock of a qualified electing fund at any time during the taxable year of such fund shall include in gross income—
(A) as ordinary income, such shareholder’s pro rata share of the ordinary earnings of such fund for such year, and
(B) as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such year.

(2) Year of inclusion
The inclusion under paragraph (1) shall be for the taxable year of the shareholder in which or with which the taxable year of the fund ends.â€￾

https://www.law.cornell.edu/uscode/text/26/1293

[mabeau]

That the inclusion is the ordinary income plus net capital gains makes sense from 1293(a). However, if there are distributions that year, 1293(c) of the code ("such distribution shall immediately reduce earnings and profits") seems to imply that this distribution should be removed from the profit (or inclusion?) (i.e. the new inclusion would be $269.79 - $57.65 = $212.14)?

What is your take on this whiterhino? It is also possible 1293(c) has no impact on the inclusion stated in 1293(a) and is only used to calculate basis adjustment.

[whiterhino]

Since we are already including the income from the QEF on 1040 (ordinary) and Schedule D (capital gains), my understanding is that 1293(c) is used to avoid that income being reported and taxed twice, first as the income from a QEF (in the context of section 1293) and then again as a dividend on Schedule D (in the context of section 316).

I think you are right that 1293(d) is an issue related to basis and not the inclusion calculation.

1293(c) reproduced below:
“(c) Previously taxed amounts distributed tax free
If the taxpayer establishes to the satisfaction of the Secretary that any amount distributed by a passive foreign investment company is paid out of earnings and profits of the company which were included under subsection (a) in the income of any United States person, such amount shall be treated, for purposes of this chapter, as a distribution which is not a dividend; except that such distribution shall immediately reduce earnings and profits. If the passive foreign investment company is a controlled foreign corporation (as defined in section 957(a)), the preceding sentence shall not apply to any United States shareholder (as defined in section 951(b)) in such corporation, and, in applying section 959 to any such shareholder, any inclusion under this section shall be treated as an inclusion under section 951(a)(1)(A).â€￾