August 3, 1992
TO: TAX COMMITTEE NO. 30-92
INTERNATIONAL COMMITTEE NO. 16-92
ACCOUNTING/TREASURERS COMMITTEE NO. 34-92
RE: INSTITUTE COMMENTS ON PROPOSED PASSIVE FOREIGN INVESTMENT
COMPANY REGULATIONS
__________________________________________________________
Attached is the Institute’s comment letter on the passive
foreign investment company ("PFIC") regulations that were
proposed earlier this year. (See Institute Memorandum to Tax
Members No. 23-92, Accounting/Treasurers Members No. 20-92,
Closed-End Fund Members No. 19-92 and International Members No.
7-92, dated April 3, 1992). The Institute generally supports the
proposed regulations, particularly that portion which would
provide a mark-to-market election for regulated investment
companies ("RICs") investing in PFICs. The letter strongly urges
that the regulations be adopted in final or temporary form as
soon as possible.
The Institute made several technical comments on the
proposed regulations. The proposed regulations appear to require
that PFIC stock be marked-to-market for purposes of the excise
tax provisions of Internal Revenue Code ("Code") section 4982 on
December 31 of each year. Because of the potential daily
fluctuations in the value of PFIC stock, it is impractical for
RICs to mark their PFIC stock to market on the same day that they
must declare dividends. The Institute recommended that PFICs
should be marked to market on October 31, similar to the
treatment of foreign currency gains, and that any mark-to-market
gains arising after October 31 be treated as arising at the
beginning of the next calendar year. Because of similar concerns
over the practicality of distributions, the Institute also
recommended that gain on actual dispositions of PFIC stock after
October 31 be treated as foreign currency gain.
The Institute recommended that the transition rule of the
proposed regulations be modified. The current rule provides that
a RIC be allowed to mark to market its accumulated unrecognized
PFIC gain as of the first day of the RIC’s tax year in which the
proposed regulation is finalized. This rule could cause the RIC
to incur an excise tax liability under Code section 4982 for the
previous calendar year if the first day of the RIC’s tax year is
in the previous calendar year. The transition rule gain would be
treated as having been realized in the previous calendar year,
which could mean that the RIC would not have distributed 98% of
the sum of (1) the income it previously had earned and (2) the
PFIC transition rule gain. The Institute recommended that the
transition rule gain be treated as arising on the first day of
the calendar year in which the regulations are adopted.
The Internal Revenue Service requires PFIC shareholders
annually to file a Form 8621, Return by a Shareholder of a
Passive Foreign Investment Company or Qualified Fund. The
Institute stated that the Service should publish a list of the
entities reported as PFICs on that Form.
The Institute also requested clarification that when a
taxpayer is treated as owning stock of a PFIC under the "once a
PFIC, always a PFIC" rule, and the foreign corporation would no
longer be a PFIC under the regulations, the disposition of all of
the PFIC stock halts the application of the "once a PFIC, always
a PFIC" rule. Thus, the later acquisition of shares of the
former PFIC by the taxpayer would not be treated as the purchase
of PFIC shares.
Finally, the Institute asked that (1) lending of PFIC
shares in a Code section 1058 securities lending transaction not
be treated as a disposition of PFIC stock, and (2) wash sales of
PFIC shares be treated as stopping the holding period of the PFIC
shares for purposes of determining whether the taxpayer is
subject to the deferred tax on excess distribution arising from
the disposition of PFIC shares.
We will keep you informed of further developments.
David J. Mangefrida Jr.
Assistant Counsel - Tax
Attachment