United States: IRS Issues Notice On Treatment Of U.S. Shareholders Owning PFIC Stock Through Taxexempt Organizations Or Accounts

In Notice 2014-28, the IRS announced that it intends to amend regulations under Section 1291 to provide guidance concerning the treatment of U.S. persons that own stock of a passive foreign investment company (PFIC) through certain tax-exempt organizations or accounts.

The specific tax-exempt organizations and accounts are described in Treas. Reg. Section 1.1298- 1T(c)(1). On Dec. 31, 2013, Treasury and the IRS published temporary and proposed regulations under Sections 1291 and 1298. However, neither Section 1291 nor its corresponding regulations provide specific guidance on the application of Section 1291 to a U.S. person owning stock of a PFIC through a tax-exempt organization or account.

Although the regulations provide that tax-exempt organizations or accounts are generally not subject to Section 1291 with respect to their direct or indirect ownership of PFIC stock, a U.S. person that is a beneficiary of, or has an interest in, a tax-exempt organization or account may be treated as a direct or indirect shareholder of the PFIC stock owned by the organization or account under the temporary regulations, and thus may be subject to taxation under Section 1291.

In the notice, the IRS said 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. Accordingly, the IRS intends to amend the definition of "shareholder" in the Section 1291 regulations to exclude U.S. persons that own stock of a PFIC through a tax-exempt organization or account.

The regulations incorporating the guidance described in Notice 2014-28 will be effective for taxable years of U.S. persons that own stock of a PFIC through a tax-exempt organization or account, ending on or after Dec. 31, 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.