Other Anti-Deferral Provisions Tx 8300

Learning Objectives 1.Explain the reason for FPHCs, PFICs, and QEFs 2.Identify PFICs 3.Calculate the tax and ________ charges resulting from PFIC status 4.Explain the benefits of _____ 5.Define FPHCs 6.Explain how the FPHC provisions curb tax _________ You should be able to:

Barriers to Tax Deferral Controlled foreign corporations –____________ ownership can avoid CFC status –_____________ abroad avoids Subpart F –__ _______ activity avoids Subpart F _______ foreign investment companies Foreign personal ______ companies

PFIC: Defined or 1.Experience operating ______ 2.Possess ___ business assets 3.Raise _______ 4.________ large holdings Foreign __________ companies usually are PFICs. Also, foreign _________ companies are vulnerable when they: Foreign corporation if

Example: PFIC Status Three NRAs and ___ U.S. citizens own equal amounts of TourCo. Sixty percent of TourCo’s assets earn passive income, and ___% of TourCo’s income is passive. Under what conditions does TourCo avoid PFIC status?

PFIC: Results U.S. persons owning PFIC stock Pay ________ charge when they: –Receive ________ or –Realize ____ from selling stock Differs from CFC regime –No __________ dividends –U.S. persons owning < ___% pay interest charge

PFIC: Excess Distributions Total ______ Distribution Current Aggregate Distributions Average Distributions in Prior __ Years - ____% x= Distribution Non-Excess Portion is _______ Gross Income Allocated Over _______ Period Gross income if allocable to: Current year, Pre-19___ years, or Days before ____ status Used to calculate ________ ___ ______

PFIC: Deferred Tax Amount Deferred Tax Amount Aggregate Increases in _____ Aggregate Amount of ________ ______ distribution allocable to post PFIC years other than _______ year times ___ statutory rates Interest on “aggregate increases in taxes” using rate _____ points higher than Federal _____-term rate

Example: Deferred Tax Amount On 1/1/01, DomCo bought all shares in a PFIC. The PFIC paid cash dividends to DomCo as follows: $10,000 on 12/31/01 $10,000 on 12/31/02 $11,000 on 12/31/03 $12,000 on 12/31/04 $______ on 12/31/05 Assume the top corporate tax rate is ___% and the applicable interest rate is ___%. Calculate the deferred tax amount in 2005.

PFIC: Problems and Solutions Negative aspects of PFIC regime –Retroactive loss of ________ –___ statutory rates –No _______ gain treatment Mark-to-______ elections Qualified ________ funds

Mark-to-Market Election Available only if PFIC stock has clearly- established ______ value –________ gain or loss recognized ____ year –_____ of shares adjusted Benefits –No interest charge –Otherwise unrealized losses __________ –____ applicable rather than ___ statutory rates

Qualified Electing Fund Election applies to ___________, not PFIC _____ treatment for income (not ______) Benefits –No interest charge –____ applicable rather than ___ statutory rates –_______ gains flow through from QEF to owner –Selling QEF stock can result in _______ gain

FPHC: Defined Foreign corporation Five or fewer ___ individuals directly, indirectly, or constructively own __ ___% of voting _____ or stock value FPHC income ≥ ___% of gross income (or ___% in later years)

FPHC: Results Constructive dividend to U.S. _______ owning stock Pro rata portion of _____________ FPHC income Increase stock _____