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November 5, 2015 - Debra Rudd

Upcoming presentations and purging elections

Hello from Debra Rudd.

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CalCPA International Tax Conference — November 6

Tomorrow, November 6, I will be speaking at the CalCPA International Tax Conference, a full-day event dedicated to practitioners who work with individuals whose tax situations cross the US border — either US persons living and working abroad, or foreigners coming to the US to work or make investments. The topic for my presentation will be “Taking the Pain out of PFICs: A Survey of Purging Elections”.

Please attend the conference if you can. It is a wonderful resource for those of us who work in international tax (and 8 hours of CPE credit for having attended. Imagine that: You can learn something AND get CPE credit!)

International Tax Lunch — November 13

If you cannot attend the conference but still would like to hear my presentation, I will be speaking on the same topic at our monthly International Tax Lunch, scheduled for Friday, November 13 at 12:00 noon Pacific time at our office in Pasadena, California. Everyone is welcome to attend, either in person at our office or via dial-in, and attendance is free. (And if you attend in person at our office, we’ll buy you lunch.)

If you want to attend in person, register here.
Click the big green button that says "register in the upper right corner.

If you want to call in, register here.
Click the big green button that says "register in the upper right corner.

A broad overview of purging elections

The topic I will be covering in these presentations is PFIC purging elections. I have talked about them from time to time in this newsletter, and the presentation will tie together the various elections available, who can make them, when they can be made, and how to make the elections on the tax forms.

It is intended more as a broad overview than as an in-depth study. One thing I have learned from Phil about writing and delivering presentations: If you have an hour to talk, you can go broad, or you can go deep, but you cannot do both. At some point in the future I would like to do more detailed studies of the individual elections available. For now, I have created what I think is a helpful guide to understanding how, when, and whether to utilize each of the various elections.

Purging elections mean paying tax

At one point several years ago, I remember the international tax scene being all atwitter about PFIC purging elections. I would hear questions such as: How do we make purging elections? What about late purging elections??? If only we could make purging elections, everything would be better for our clients!

What you are doing when you make a purging election is solving a timing issue. You are deciding to pay a certain amount of tax now instead of an uncertain amount of tax in the future. You are making a bet that things will get better (your PFIC will generate more income and/or increase in value) rather than worse (your PFIC will lose money and you will sell it at a loss).

What I mean about solving a timing issue is this: Under any purging election that exists, you will be making a pretend sale or recognizing a pretend distribution under the IRC §1291 excess distribution rules. That means tax at ordinary rates on a portion of the income, tax at maximum rates on the remainder of the income, and all of the maximum-rate income tax is also subject to a daily compounded interest charge that goes back to the beginning of your holding period.

So when you make a purging election, it is generally because you expect the value of your PFIC to increase, or for it to be paying out increasingly large distributions in future years, and you want to improve the tax results for those eventualities. If you expect to receive smaller distributions, or if you expect the value of the PFIC to decrease, it actually may make sense to not make a purging election and allow it to remain a PFIC, because the tax you pay now by making the purging election could easily exceed the tax you would instead pay later when you sell or receive distributions from your diminished-in-value PFIC.

Practical considerations should be at the front of our minds when solving problems for our clients: Is a purging election really the right move? Between tax and professional fees, does it make financial sense?

Hope to see you there

I hope to see you either at the CalCPA International Tax Conference on November 6, or our monthly International Tax Lunch on November 13. Please say “hi” if you attend!

Debra

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