JASON FREEMAN, JD - Purging the PFIC Taint

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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Mutual funds are defined as “an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and similar assets.”

The logic behind investing in mutual funds is that, instead of placing money directly into the Stock Market and losing due to incorrect speculation, the investment is handled by efficient fund managers. Risks are lowered due to the diversification of the portfolio according to an individual’s risk tolerance. That’s what mutual funds are for those who didn’t know.

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