Tax Traps of Passive Foreign Investments (Reporting the Family Business)


Many taxpayer’s have interests in offshore business that they acquired through inheritance or gift. Often these interests are purely passive, in that the U.S. taxpayer does not take an active role in management but instead collects dividends, interest or royalty income from the “family holdings”. Many “dual citizens” have such family holdings. To the extent that the source of the payment is either 75% or more passive income (dividends, interest or royalties) or is earn from assets which are at least 50% passive income generating assets, the source of the income is considered to be from a Passive Foreign Investment Company (PFIC) and must as a result of the HIRE Act, be reported on IRS Form 8938 (still in draft) for tax years 2011 and thereafter. As a result of the HIRE Act (and its Section 6038D) tax professionals preparing 2011 returns may be under a duty to ask specifically about PFIC income in addition to the existence of foreign controlled financial accounts, offshore trusts and other foreign holding, like Controlled Foreign Corporations (CFC’s).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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