A passive foreign investment company (PFIC) is a foreign corporation that meets either of two tests: an Asset test or an Income test. A U.S. person who is a direct or indirect shareholder of a corporation that satisfies either test in a prior year is treated as holding stock in a PFIC and who does not make a timely qualified electing fund (“QEF”) election continues to be subject to taxation under section 1291’s default “excess distribution” tax regime unless the shareholder makes an election to purge the PFIC taint (for example, through a deemed sale).
A taxpayer may avoid section 1291 taxation by making a QEF election for the first year that the taxpayer holds stock in the foreign corporation. But a taxpayer who fails to make a timely QEF election will continue to be subject to the excess distribution regime, unless they make a purging election to cleanse the PFIC status.
We explore below several elections to purge the PFIC taint.
Once A PFIC, Always A PFIC?
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