The Internal Revenue Service plans to amend the regulations for the treatment of U.S. taxpayers who own passive foreign investment company stock through tax-exempt organizations.
In Notice 2014-28, the IRS said last week that it and the Treasury Department will amend the regulations under Section 1291 of the Tax Code to provide guidance concerning the treatment of U.S. persons that own stock of a passive foreign investment company through an organization or an account that is tax-exempt, including a state college or university, an individual retirement plan or annuity, or a qualified tuition program.
Section 1291 imposes a special tax and interest charge on a U.S. person that is a shareholder of a passive foreign investment company, or PFIC, and receives an excess distribution from the PFIC, or recognizes a gain derived from a disposition of the PFIC that is treated as an excess distribution.
The Treasury Department and the IRS believe that the application of the PFIC rules to a U.S. person treated as owning stock of a PFIC through a tax-exempt organization or account would be inconsistent with the tax policies underlying the PFIC rules and the tax provisions applicable to tax-exempt organizations and accounts.
For example, applying the PFIC rules to a U.S. person that is treated as a shareholder of a PFIC through the U.S. person’s ownership of an individual retirement account described that owns stock of a PFIC would be inconsistent with the principle of deferred taxation provided by IRAs. Accordingly, the Treasury Department and the IRS will amend the definition of shareholder in the Section 1291 regulations to provide that a U.S. person that owns stock of a PFIC through a tax-exempt organization or account is not treated as a shareholder of the PFIC.