Other Anti-Deferral Provisions Tx 8300

1. Other Anti-Deferral ProvisionsTx 8300

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

3. 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

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

5. 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?

6. 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

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

8. PFIC: Deferred Tax Amount ______ distribution allocable to post-1986 PFIC years other than _______ year times ___ statutory rates Aggregate Increases in _____ Deferred Tax Amount Interest on “aggregate increases in taxes” using rate _____ points higher than Federal _____-term rate Aggregate Amount of ________

9. 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.

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

11. 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

12. 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

13. 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)

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