Introduction
The Purpose of the PFIC rules – Description of the 1986 Tax Reform Act
The PFIC rules were part of the general tax reform act of 1986. In order to understand the intent of the PFIC rules it is useful to read the general explanation of the tax reform act. The explanation starts at page 1021 of the document or page 1037 of the pdf. It is worth the read …
https://web.archive.org/web/20120507115421/https://www.jct.gov/jcs-10-87.pdf
The discussion of PFICs begins on page 1021 of the document. What is clear is that the purpose of the PFIC rules was to impose punitive taxation on investments in foreign corporations. The PFIC rules were designed to apply when he Subpart F rules did not apply.
In 1986, it was contemplated that taxpayers would be subject to either default (most punitive taxation) under 1291 or the QEF election under 1295 (pay tax on your share of the corporations undistributed profits). The 1296 – Mark to Market option – was created in the mid 1990s.
In February of 2014 I coauthored a submission to the Senate Finance Committee describing the problems of “PFIC Tax Rules And U.S. Citizens Overseas“. That submission may be accessed here and here. Generally that submission focused on the application of the default 1201 treatment of PFICs.
In November of 2024 I co-authored “SEAT’s RecomendationsTo USTreasury About PFICs,Form 8621And Americans Abroad“. That submission was successful and SEAT – discussed in “Treasury’s Response To Form 8621 Comments: The Good, The Bad And The Ugly” – did influence a positive change in Form 8621.
This is generally regarded as the more forgiving option. Basically, tax is paid on the corporations profits as they arise. When the profits are distributed no U.S. tax is paid. (Of course foreign tax is paid which creates the possibility of double taxation.)
Generally the 1295 QEF election is to be made when the PFIC is first reported on Form 8621. It is not uncommon for taxpayers to find themselves in a position where they didn’t know they had a PFIC.
Revenue procedure 26-10 has created a way to make the QEF election retroactively. My first impression is that this will NOT be helpful to Americans abroad who have their retirement savings or pensions in PFICs. But, we will see.
A pdf of Revenue Procedure 26-10 is here.
Because the text of the procedure is long and comprehensive I ran rp-26-10 through an AI program which produced the following written summary and accompanying video.
AI generated written summary of Revenue Procedure 26-10
Revenue Procedure 2026-10 provides comprehensive guidance for taxpayers seeking to make a retroactive Qualified Electing Fund (QEF) election regarding their interests in a Passive Foreign Investment Company (PFIC). The document outlines the specific eligibility requirements, such as proving a reasonable belief that the entity was not a PFIC or demonstrating reliance on a qualified tax professional. It details the mandatory filing procedures, including the submission of sworn affidavits, ownership history, and the payment of specific IRS user fees. Furthermore, the text clarifies how the government determines if a late election would prejudice the interests of the United States, potentially requiring a review of the shareholder’s historical tax liability. To assist with compliance, the IRS offers informal pre-filing consultations and provides a checklist to ensure all necessary documentation is included in a ruling request.
AI generated video based on Revenue Procedure 26-10
Conclusion and summary
I believe its unlikely that the Revenue Procedure 26-10 will be used by many Americans abroad. As revealed by the text and video, it’s simply too cumbersome, expensive and dependent on assistance from tax preparers.
John Richardson – Follow me X.com/ExpatriationLaw
Appendix
Here is a very good summary of Revenue Procedure 26-10 from Roberts Holland.
A PDF version is here:
TAXSTRINGER-Article-January-February-Tax-Cases
A direct link to Revenue Ruling 26-10 is here: