1 5 1 T.C. No . 4

UNITED STATES TAX COURT

ROBERTO TOSO AND M ARCELA SALM AN, Pet i t i o n ers v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 8 3 2 4-1 5. Fi l edSep t em b er 4 , 2 0 1 8
.

Ps t i m el y fi l edretu rn s fo r t h ei r 2 0 0 6, 2 0 0 7 , an d 2 0 0 8 i n co m e t ax b u tfai l edt o rep o rtg ai n s fro m s al es o f s t ock s i np as s i v e fo rei g n i n v es t m en tco m

pan i es (PFICs ). Ps as s ertth atas s es s m en to f an y d efi ci en cy

i s t i m e b arred b ecau s e fo r each y ear t h e n o t i ce o f d efi ci en cy

was i s su edo u t s i d e t h e t hree-y ear l i m i t at i o n s p eri o d u n d er I.R.C. s ec. 6 5 0 1 (a). R as s ert s th atth e l i m it at i o n s p eri o di s ex t en d ed t o s i x y ears u n d er I.R.C. s ec. 6 5 0 1 (e)(1 )(A)(i ), wh i ch ap p l i es i f t h e t ax p ay er o m i t s an am o u n to f g ro s s i nco m e i nex ces s o f 2 5 % o f t h e g ro s s i n co m e rep o rt edo n th e ret urn . Res o l u t i on o f t h i s i s su e tu rn s l arg el y o n wh et h er g ai n s fro m

s al es o f PFIC s t ock s th at are ex cl u d ed p u rs uan tt o I.R.C. s ec. 1 2 9 1 fro m g ro s s i n co m e fo r t h e cu rren ty ear (n o n -cu rren t -y ear PFIC g ai n s ) are p ro perl y co u n t edas g ro s s i n co m e fo r p u rp o s es o f I.R.C. s ec. 6 5 0 1 (e)(1 )(A)(i ). Ps al s o as s ertth at , t o th e ex t en tth e as s es s m en ts are n o tt i m e b arred , an y d efi ci en cy

s h o u l db e redu ced b y

o ffs et t i n g th ei r PFIC g ai n s wi th PFIC l o ss es i n ap p l y i n g I.R.C. s ec. 1 29 1
.- 2
- Hel d : No n -cu rren t -y ear PFIC g ai ns are n o tco u n t edas g ro ss i n co m e fo r p u rp o ses o f I.R.C. s ec. 6 5 0 1 (e)(1 )(A)(i ). Hel d , fu rt h er, as s es s m en to f Ps ’ 2 0 0 6 d efi ci en cy i s n o tt i m e b arred u n d er I.R.C. s ec. 6 5 0 1 (e)(1 )(A)(i ) b ecau s e aft er ex cl ud i n g n o n -cu rren t -y ear PFIC g ai n s , Ps o m i t tedan am o u n tfro m th ei r 2 00 6 retu rn g reat er t h an 2 5 % o f t h e g ro s s i n co m e rep ort edo n th atretu rn . Hel d , fu rt h er, as s es s m en to f Ps ’ 2 0 0 7 an d2 0 0 8 d efi ci en ci es i s t i m e b arred
. Hel d , fu rt h er, I.R.C. s ec. 1 2 9 1 d o es n o tp ro vi d e fo r o ffs et t in g PFIC g ai n s wi th PFIC l o s s es .

Ro b ertS. Sch wart z an d El i zab et h C. Pet i te, fo r p et i t i on ers . St ev enD. Ti l l em , fo r res p o n d en t
.

OPINION THORNTON, Jud g e: By n o t ice o f d efi ci en cy , res po n d en t d et erm i n ed d efi ci en ci es i n p et i ti o n ers ’ Fed eral i n co m e t ax an dp en al t i es u n d er s ect i o n6 6 6 2- 3
-

wi th res p ect t o th ei r t ax y ears 2 0 0 6 , 2 0 0 7 , an d2 0 0 8. 1 Aft er co n ces si o n s , 2 th e i s su es fo r d eci s i o n are (1 ) wh et h er as ses s m en to f t he d efi ci en ci es i s t i m e b arred
u n d er s ect i o n 6 5 0 1 an d(2 ) t o th e ex t en t as s es sm en ti s n o tt i m e b arred , wh et h er p et i t i o n ers are en t i t l ed t o o ffs etg ai n s fro m s al es o f s t o ck s i np as s i v e fo rei g n i n v es t m en tco m

pan i es (PFICs ) wi th l o s s es fro m s al es o f PFIC s t o ck s , s o as t o redu ce t h e t o t al am o u n to f g ai n t ax edu n d er s ect i o n1 2 91
. Back gro u n d Th e p art i es s ubm it t edth i s cas e fu l l y s t ip u l at edp u rs u an tt o Ru l e 1 22
. Pet i t io n ers res i d edi n Vi rg i ni a wh en th ey t i m el y p et i t i o n edth e Co u rt
.

1 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de o f 1 98 6 (Co d e), as am en d edan di n effect atal l rel ev an tt i m es ; al l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an d Pro cedu re. W e ro u n d al l m o n et ary

am o u n t s t o the n eares td o ll ar. 2 Pet i t i on ers co n ced e thatth ey are s ub j ectt o s ec. 6 6 6 2 p en al t i es , t o b e co m p u t edi n acco rd an ce wi th the i s s u es d eci d edi n th i s cas e. Co n s is ten twi th th e h o l d i n g o f Rafi zad eh v . Co m m i s s i o n er, 1 50 T.C. _

_ _ (J an . 2 , 2 0 18 ), res p o n d en t co n ced es th ats ec. 6 5 0 1(e)(1 )(A)(i i ) (g en eral l y p ro v i d i n g a s i x -y ear l i m i t at i o n s p eri o dwi th res p ect t o an o m is s i o nfro m g ro s s i n co m e ex ceed i n g $ 5 ,0 0 0 an d at tri b u t ab l e t o as s et s fo r wh i ch i n fo rm at i o n rep o rt i n g i s req u i redu nd er s ec. 6 0 3 8 D) i s i n ap p li cab l e. Ad d i t i o n al l y , res p o n d en th as n o tas s ert edth ats ec. 6 5 0 1 (c)(8 ) wo u ld ap p l y

i n t h i s cas e, an dwe d eem an y s uch arg u m en t t o h av e b een wai v ed o r co n ced ed
.- 4
-

Pet i t i o ners t i m el y

fi l edth ei r 2 0 0 6 , 2 0 0 7 , an d2 0 0 8 Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Retu rn , rep o rt i n g g ro s s i n co m e o f $ 21 0 ,4 1 4, $ 2 34 ,6 8 8 , an d $ 2 4 7 ,6 5 0 , res p ect iv el y . 3 OnJ u l y 2 1 , 2 0 0 8 , res po n d en t i s s u eda J o h nDo e s umm o ns t o UBS AG
s eek i n g i n fo rm at i o n o n cert ai n acco u nt s fo r t h e y ears 2 0 02 -0 7
. 4 Pet i t io n ers h adan
acco u n t w i th UBS AG du ri ng th o s e y ears an di n2 00 8 . Pet i t i o ners l at er fi l ed
am en d edretu rn s fo r 2 00 6 , 2 0 0 7 , an d2 0 0 8 , wh i ch rep o rt edi t em s n o trep o rt edo n th ei r o ri g i n al return s . 5 Th e ad d i t i o n al i t em s rep o rt edo np et i t i o ners ’ am en d ed retu rn s rel at e t o i n v es t m en t s h el di n th ei r UBS AG acco u n t
. OnJ an u ary

6 , 2 0 1 5 , res p o n d en t i s s u edt o p et i t io n ers a n o t i ce o f d efi ci en cy d et erm i n i n g d efi ci en ci es i n th ei r 2 0 0 6, 2 0 0 7 , an d 2 0 0 8 i n co m e t ax o nth e b as i s o f th e am en d edretu rn s an dd et erm i n i n g p en al ti es o n th e b as i s o f t he o ri g i n al retu rn s . Th ati s , i n d et erm in i n g th e d efi ci en ci es , th e n o t i ce o f d efi ci en cy ad ju st edo n l y th o s e i t em s th atp et i t io n ers rep o rt edo nth ei r am en d ed retu rn s b u tth atth ey h adn o t

3 See i n fra n o t es 2 1-2 3.
4 No s u m m on s was is s u edwi th res p ectt o 2 0 0 8.
5 Th e p art i es ag ree t h atth es e retu rn s were n o tqu al i fi edam en d edretu rn s . See s ec. 1 .6 6 6 4-2 (c), In co m e Tax Reg s . (p ro v i d i ng th at i f a t ax p ay er fi l es a qu al i fi edam en d edretu rn , an y s ec. 6 6 6 2 p en al ty

wi l l b e co m

p ut edo nthe b as i s o f th e qu al i fi edam en d edreturn u n l es s th e o ri g i nal retu rn was frau du l en t ).- 5
-

rep o rt edo n thei r o ri g i n al retu rn s (wh ereas th e n o t ice o f d efi ci en cy d et erm i n ed p en al t i es as i f n o am en d edretu rn s h adb een fi l ed ). Th e n ot i ce o f d efi ci en cy d et erm i n edth atam ou n t s rep o rt ed o np et i t io n ers ’ am en d ed retu rn s as l on g -t erm cap i t al g ai n s were g ai n s fro m s al es o f s t o ck s i nPFICs (as d efi n ed i ns ect io n 1 2 9 7 ). 6 Th e p art i es h av e s t ip ul at ed(1 ) wh i ch o f p et i t i o ners ’ s ecu ri t ies were PFIC
s t ock s (p et i t i o n ers co n ced e t h ats o m e o f t h em were PFIC s t o ck s; res p o n den t
co n ced es th ats o m e o f t h em were n o t ) an d(2 ) h o w th e i t em s d i s cl o sedfo r t h e fi rs t t i m e o n p et i t i o n ers ’ am en d edretu rn s s h o u l dh av e b een ch aract eri zed an d rep o rt ed
. Th e p art i es al s o ag ree t h atth e fo l l o wi n g i tem s an dam o un t s were n o t rep o rt edo n p et i t i o n ers ’ o ri g i n al retu rn s b u ts ho u l dh av e b een : 7

6 In g en eral , a fo rei g n co rp o rat i o ni s a PFIC i f 7 5 % o r m o re o f th e g ro s s i n co m e o f t h e co rp orat io n fo r t h e t ax ab le y ear i s p as s i v e o r i f t he av erag e p ercen t ag e o f as s et s h el ddu ri n g th e t ax ab le y ear t h atp ro du ce, o r are h el dfo r t h e p ro duct i o n o f, p as s i v e i n co m e i s atl eas t5 0 % . Sec. 1 2 9 7 (a).

7 W e ex p l ai n i n m o re d et ai l b el o w (1 ) t h e m ean i n g o f t he t erm s cu rren t -y ear an d n o n -cu rren t-y ear PFIC g ai n , s ee i n fra p p . 1 0-1 1 , an d as n eces s ary , (2 ) h o w cert ai n o f t hes e am o u n ts were cal cu l at ed , s ee i n fra p p. 2 0 -2 2
.- 6
- It em 2 0 06 2 0 07 2 0 0 8 Lo n g -t erm

cap i t al g ai n s $ 8 ,9 2 7 -0
- $ 3 2 2 Sh o rt -t erm cap i tal g ai n s 2 1 ,6 3 8 -0
- 4 6 5 Cu rren t -y ear PFIC g ai n s 3 0 ,3 8 8 $ 8 ,4 3 1 1 7 ,6 1 6 No n -cu rren t -y ear PFIC g ai n s 5 5 ,2 6 9 4 1 ,1 7 0 2 0 6 ,7 4 4 In t eres t 8 ,3 79 1 7 ,9 78 1 9 ,1 6 5 Di v i den d s 3 ,4 21 1 4 ,0 95 1 , 6 63 Di s cu ss i o n Pet i t i o ners co n t en dth atas s es s m en to f t h e d efi ci en ci es fo r al l y ears ati s s ue i s t im e b arred u nd er s ect i o n 6 5 0 1 (a). 8 Al tern at i v el y , p et i t i o n ers co n t en d t h at
res p o n d en t m i s cal cu l at edth e d efi ci en ci es ; th ey arg u e t h ati f an y o f t h e d efi ci en ci es i s n ott i m e b arred , th ey are en t i t l edt o o ffs etth ei r g ai n s fro m s al es o f PFIC s t o ck s wi th th ei r l o s s es fro m s al es o f PFIC s t o ck s fo r t h e p u rp os e o f

8 In th ei r t i m el y

p et it i on , p et i t i o ners as s ertth at as ses s m en to f th e 2 00 7 an d 2 0 0 8 d efi ci en ci es i s t i m e b arredu n d er s ec. 6 5 0 1 (a). Th ei r o p en i n g b ri ef co n t en d s th atas ses s m en t o f t h e 2 0 0 6 d efi ci en cy i s al so t i m e b arred u n d er s ec. 6 5 01 (a). Sec. 6 5 0 1 (a) p ro v i d es an affi rm at iv e d efen s e, an d th e p art y rai s i ng i tm

u s ts p eci fi cal l y p l eadan d p ro ve i t . Ru l es 3 9 , 1 4 2 (a); e.g ., M eco m v . Co m m i ss i o n er, 1 0 1 T.C. 3 7 4 , 3 8 2 (1 99 3 ), aff’ d wi th o ut p ub l is h edo p in i o n, 4 0 F.3 d 3 8 5 (5 th Ci r. 1 9 9 4 ). Pet i t io n ers h av e p l ead edth e d efen s e p ro p erl y wi th res p ectt o 2 0 07 an d2 0 0 8
. Th ey d i dn o tp l eadth i s d efen s e wi th res p ectt o 2 00 6 , b u tres p o n d en t h as n o t o b ject edt o th ei r rai s i n g th e i s s u e o nb ri ef. W e d eem res p o nd en t t o h av e wai v edo r co n ced edan y

s u ch o b ject i o n . W e wi l l th erefo re co ns i d er th i s as an i s s u e t ri edb y co n sen tu n d er Ru l e 4 1 (b )(1 ).- 7
-

cal cu l at in g th ei r t ax u n d er s ect i o n1 2 91 . Res p o n d en tco n ten d s th atg ai ns an d l o s s es m ay n o tb e n et t edfo r t h atp urp o s e; h e arg u es thatan y g ai ns fro m

s al es o f PFIC s t o ck s are t ax ed u n d er s ect i o n1 2 9 1 an d an y l o s s es are t reat ed s ep arat el y as cap i t al l o s s es . I. St atu t e o f Li m it at i o n s In g en eral , s ect i o n 65 0 1 (a) p ro v id es a t h ree-y ear p eri odo f l i m i t at i on s fo r th e Co m m i s s i o n er t o as s es s an i n co m e t ax l iab i li ty . Th e t hree-y ear p eri o d g en eral l y b eg i n s t o ru n aft er t h e ret u rn i s fi l edo r d eem edfi led . Sec. 6 5 0 1 (a) an d (b )(1 ). Th e p art i es ag ree t h atth i s th ree-y ear l i m i t at i o ns p eri o dh adex p i redas o f th e d at e t h e n o t i ce o f d efi ci en cy was i s s u ed
. 9 Sect io n 6 5 0 1 (e)(1 )(A)(i ) p ro v i d es an ex cep t i on t o th i s g en eral three-y ear
ru l e. 1 0 If t h e t ax p ay er o m i t s fro m g ro s s i n co m e an am ou n t p ro p erl y i n cl u d i b l e

9 Th e i s s uan ce o f a n o t i ce o f d efi ci en cy s u s p en d s the ru n n i n g o f t h e s ec. 6 5 0 1 p eri o do f l i m it at i o n s . Sec. 6 5 0 3 (a). If t h e t ax pay er p et i t i o ns th i s Co u rto n th e b as i s o f a n o t i ce o f d efi ci en cy , as p et i t i o n ers h av e d o n e, t h e s ec. 6 50 1 p eri o d o f l i m i t at i o n s rem ai n s s u s p en d edu n t i l 6 0 d ay s aft er t he d eci s i o no f t he Tax Co u rt b eco m es fi n al . Sec. 6 50 3 (a).

1 0 Th e Hi ri n g In cen t i v es t o Res t o re Em p l oym en tAct(HIRE Act ), Pub . L. No . 1 1 1 -1 4 7 , s ec. 5 1 3(a)(1 ), 1 24 St at . at1 1 1 (2 0 1 0 ), red es i g n at eds ec. 6 5 0 1 (e)(1 )(A) as s ec. 6 5 0 1 (e)(1 )(A)(i ) an dad d edn ew s ec. 6 5 01 (e)(1 )(A)(i i ). Th es e ch an g es are effect i ve fo r retu rn s fi l edaft er M arch 1 8 , 2 0 1 0 , an dfo r earl ier retu rn s i f t he p eri o do f l i m i t at i on s fo r as s es sm en to f t h e t ax rep o rt edh adn o t ex p iredas o f M arch 1 8 , 2 0 1 0 . Pet i t i o n ers fi l edt i m el y o ri gi n al retu rn s fo r 2 0 0 6 ,

(co n ti n u ed ...)- 8
-

th erei n an dth e o m i s s i on ex ceed s 2 5 % o f t h e am o u n t o f g ro s s i n co m e rep o rt edi n th e ret urn , th en th e p eri o do f l im i t at i o n s i s ex t en d ed t o s i x y ears . Sec. 6 5 0 1 (e)(1 )(A)(i ). Res po n d en t co n ten d s th i s ex cep t i o nap p li es i nth i s cas e. Th e p art i es ag ree t hati f th e s i x -y ear l i m it at i o n s p eri o do f s ect i o n6 5 0 1 (e)(1 )(A)(i ) ap p li es , th enthe n o ti ce o f d efi ci en cy was i s s u edwi thi nth e s ix -y ear p eri o dfo r each y ear at i s s u e. 1 1 Th e p art i es d i s ag ree, h o w ev er, as t o wh et h er t h e s i x-y ear l i m i tat i on s p eri od ap p li es . Th ei r d i s ag reem en t tu rn s l arg el y o nwh et h er cert ai n g ai n s fro m

p et i t i o n ers ’ s al es o f PFIC s to ck s are co u n t edas g ro ss i n co m e fo r p u rp os es o f s ect io n 6 5 0 1 (e)(1 )(A)(i ).

1 0 (...co n t i nu ed ) 2 0 0 7 , an d2 0 0 8 . Fo r p u rp o ses o f t h e s ec. 6 5 0 1 s t atu t e o f l i m i t at i o ns , t i m el y fi l ed i n co m e t ax retu rn s are d eem edt o h av e b een fi l edas o f t h e l as td ay fo r fi l i ng . See s ec. 6 5 01 (b )(1 ). Co n s equ en t l y , th e p eri o do f l i m i tat i o n s was o pen fo r al l th ree y ears as o f M arch 1 8 , 2 0 1 0 , s o th atth e HIRE Act ch an g es d es cri b edab o ve are effect i v e fo r al l o f t h e ret urn s ati s s u e.

1 1 Th e p art i es ’ ag reem en to nth i s i s su e t ak es i n to acco u n tthe effect o f s ec. 7 6 0 9 (e) wi th res p ectt o p et i t i o n ers ’ t ax ab l e y ears 2 0 06 an d2 0 0 7 . As rel ev an t h ere, s ec. 7 6 0 9 (e) s u s p en ds the s ec. 6 5 0 1 p eri o do f l i m i t at i o n s , wi th res p ectt o an y p ers o n wi th res p ectt o wh o s e l iab i l i ty a s u m m o n s i s i s s u ed , fo r t he p eri o d b eg in n i n g o n th e d at e wh ich i s s i x m o n ths aft er t h e s erv i ce o f s u ch s u m m o n s an d en d in g wi th th e fi nal res o l u t io n o f t he res p on s e t o the s u m m o n s . Th e p art i es ag ree th ata J o h n Do e s umm on s , s ee s ec. 7 6 0 9 (c)(3 ), (f), was i s s u edt o UBS AG an dth at th e p eri o do f l i m i t at i on s fo r p et i t i o n ers ’ 2 00 6 an d2 00 7 t ax y ears was s u s p en d ed fro m s i x m o n th s aft er s erv i ce o f t h e s u m m o n s t o th e fi n al res o lu ti o n o f t h at s u m m o n s.- 9
-

A. PFIC Gai n s an dSect i o n 6 5 0 1 (e)(1 )(A)(i )

“ [T] h e s t art i n g p o i n t fo r i n t erp ret i ng a s t atu t e i s th e l an g u ag e o f t h e s t atu t e i t sel f. Ab s en ta cl earl y

ex p res s edl eg i s lat i ve i nt en t i o n t o th e co n trary , th at l an g u ag e m

u s to rd i n ari l y

b e reg ard edas co n cl u s i v e.” Co n s u m er Pro d . Safet y Co m m ’ n v . GTE Sy l v an i a, In c., 4 4 7 U.S. 1 0 2, 1 0 8 (1 9 8 0). “ Wh en the wo rd s o f a
s t atu te are u n am

b i g u ou s * * * ‘ju d i ci al i n qu i ry i s co m p l et e.’ ” Co n n . Nat ’ l Ban kv . Germ ai n , 5 0 3 U.S. 2 4 9 , 2 5 4 (1 9 9 2 ) (qu o t i n g Rub in v . Un i t edSt at es , 4 49 U.S. 4 2 4 , 4 3 0 (1 98 1 )). “ [C] o u rt s m u stp res um e t hata l eg is l atu re s ay s i na s t atu t e wh ati t
m ean s an dm ean s i n a s t atu te wh ati ts ay s ”. Id . at2 5 3 -2 5 4.

“ Gro s s i n co m e” fo r p u rp o s es o f s ect i o n 6 5 0 1 (e)(1 )(A)(i ) g en eral l y m ean s

“ g ro s s i n co m e” as d efi n edi n s ect i o n6 1(a), wh i ch g en eral l y i ncl u d es g ai n s d eri v ed fro m d eal i ng s i n p ro p ert y . 1 2 CNT In v ’ rs , LLC v . Co m m i s s i on er, 1 4 4 T.C. 1 6 1 , 2 1 0 (2 01 5 ) (ci t i ng In s u l g l as s Co rp . v . Co m m i s si o n er, 8 4 T.C. 2 0 3 , 2 1 0 (1 9 8 5 )). Gai n fro m

th e s al e o f PFIC s to ck , h o wev er, i s t ax edacco rd i n g t o s p eci al ru l es .

1 2 Gro s s i n co m e d o es n o t, h o w ev er, i n cl ud e l o ss es res u l t i n g fro m d eal i n g s i n p ro p erty . CNT In v ’ rs , LLC v . Co m m i s s i o n er, 1 4 4 T.C. 1 6 1 , 2 1 0 (2 0 15 ). Co n s equ en t l y , l o s s es res u l t i n g fro m d eal i n g s i n p ro p ert y

are n o tn et t edag ai n s t g ai n s fo r p urp o s es o f cal cu l at i n g am o u n t s o f g ro s s i nco m e rep o rt edo na retu rn o r g ro s s i n co m e o m i t ted . Al s o, the g ro s s recei pt s o f a t rad e o r b us i n es s are g en eral l y co n si d eredt o b e g ro ss i n co m e fo r p u rp o s es o f s ec. 6 5 01 (e)(1 )(A)(i ). See s ec. 6 5 0 1 (e)(1 )(B)(i ); In s ul g l as s Co rp . v . Co m m i s s i o n er, 8 4 T.C. 2 0 3 , 2 1 0 (1 98 5 ).- 1 0 -

In g en eral , g ai n fro m

the s al e o f PFIC s t o ck i s t ax edu n d er s ect i o n1 2 9 1
u n l es s th e t ax p ay er el ect edt o treat th e PFIC as a qu al i fi edel ect i n g fu nd(QEF),
s ee s ecs . 1 2 9 3 -1 2 95 , o r el ect edt o m arkt o m ark et , s ee s ec. 1 2 9 6
. 1 3 Th e p art i es ag ree t h atp et i t i on ers m ad e n ei th er el ect i o nwi th res pect t o an y o f t h e PFICs at i s su e. Sect io n 1 2 9 1 (a) p ro v i d es th atg ai no n the d i s p os i t i o n o f PFIC s t o cki s al l o cat edrat ab l y

t o each d ay

i n th e t ax p ay er’ s h o l di n g p eri odfo r t h e s t o ck . See
s ec. 1 2 91 (a)(2 ) (t reat i n g a d i s p o s i t i o n o f PFIC s t ockas an “ ex ces s d i s tri b u t i o n ”
u n d er s ect i o n 1 2 9 1 (a)(1 )). Th e s t atu t e p ro v i d es th atg ai nal l ocat edt o th e cu rren t y ear i s i n cl u d edi n th e t ax p ay er’ s g ro s s i n co m e as o rd i n ary i n co m e. 1 4 Sec. 1 2 9 1 (a)(1 )(B). W e s h al l refer t o an y g ai nth ati s i n cl u dedi nth e t ax p ay er’ s g ro s s i n co m e fo r t h e cu rren ty ear as cu rren t-y ear PFIC g ai n , an dwe s hal l refer t o th e res t

1 3 Secs . 1 2 9 3 -1 2 9 5 al l o w PFIC s h areh o l d ers wh o el ectt o treat th e PFIC as a QEF t o b e t ax ed an n ual l y o n thei r s h ares o f t he PFIC’ s i n co m e as i ti s real i zedb y th e co rp o rat io n. Al t ern at i v el y , PFIC s hareh o l d ers m ay el ectt o b e t ax edan n u al l y o n ap p reci at io n o r d ep reci at i o n i nth e s t o ck ’ s v al u e du ri n g th e y ear (i .e., th ey m ay m arkt o m ark et ) i f the s t o cki s m ark et ab l e. See s ec. 1 2 9 6.

1 4 Ad d i t i on al l y , th e s t atu t e p ro v i d es th atth e t ax p ay er’ s g ro s s i n co m e fo r t h e cu rren ty ear i n cl u d es g ai n fro m th e s al e o f PFIC s t o ckt o th e ex t en tal l o cat edt o an y p eri o di n th e t ax p ay er’ s h o l d i ng p eri o db efo re th e fi rs t d ay o f t h e fi rs tt ax ab l e y ear o f t h e co m

p an y wh ich b eg i n s aft er Decem b er 3 1 , 1 9 8 6, an d fo r wh i ch th e co m p an y was a PFIC. Sec. 1 2 9 1 (a)(1 )(B).- 1 1 -

o f t h e g ai n , i .e., an y

g ai n o n th e s al e o f PFIC s t ocko th er th ancu rren t -y ear PFIC g ai n , as n o n -cu rren t -y ear PFIC g ai n . 1 5 Sect io n 1 2 9 1 treat s cu rren t -y ear PFIC g ai ns d i fferen t ly fro m n o n -cu rren t y ear PFIC g ai n s . Sect i o n 1 2 9 1 ex p res s l y p ro v i d es th at“ o n l y ” cu rren t -y ear PFIC g ai n s are i n cl u d ed(as o rd in ary i n co m e) i ng ro ss i n co m e. Sec. 1 29 1 (a)(1 )(B) (“ [T] h e t ax p ay er’ s g ro s s i n co m e fo r t h e cu rren ty ear s h al l i n cl ud e (as o rd i n ary i n co m e) o n l y

* * * [cu rren t-y ear PFIC g ai n s . ] ”). Cu rren t -y ear PFIC g ai n s are th erefo re t ax edu n d er t h e o p erat i o no f s ect i o n s 1 , 1 1 , 6 1 , an d 6 3 as “ g ro s s i n co m e”. By co n tras t , n o n -cu rren t -y ear PFIC g ai n s are n o t i n cl u d edi ng ro s s i n co m e fo r t h e cu rren ty ear. In s t ead , s ect i o n1 2 91 (a)(1 )(C) p ro v i d es th at“ th e t ax i m p o s ed

* * * fo r t h e cu rren t y ear s hal l b e i n creas ed b y th e d eferred t ax am o u n t”. Sect i o n 1 2 9 1 (c) g en eral l y

p ro v i des th atth e d eferred t ax am o un ti s cal cu l at edb y (1 ) al lo cat i n g th e n o n -cu rren t -y ear PFIC g ai n s t o y ears i n th e t ax p ay er’ s h o l d i n g p eri o d(rat ab l y

b y d ay p u rs u an tt o s ect i o n 1 2 91 (a)(1 )(A)), (2 ) m u l t i p l y i n g th e

1 5 Wh en we refer t o “ cu rren t -y ear PFIC g ai n ” we m ean th e am o u n to f g ai n th ati s i n cl u d edi n g ro ss i n co m e fo r t h e cu rren ty ear, n o t ju s tth e am o u n to f g ai n th ati s al l o cat ed t o th e cu rren ty ear u n d er s ec. 1 2 9 1 (a)(1 )(A). Cu rren t -y ear PFIC g ai n th erefo re i n cl u d es the t o t al am o u n ts p eci fi edi ns ec. 1 2 9 1 (a)(1 )(B), i .e., th e s u m o f an y g ai n al l o cat edt o th e cu rren ty ear p lu s an y g ai nth ati s al l o cat edt o a p eri o db efo re t h e co m

pan y b ecam e a PFIC. See s up ra n o te 1 4
.- 1 2 -

am ou n tal l o cat edt o each p art i cu l ar y ear b y th e h i g h es to rd in ary

i n co m e t ax rat e i n effect fo r t h aty ear, (3 ) co m p ut i n g an i n t eres tch arg e o nth at m u l t i pl i cat iv e p ro duct , an d(4 ) t ak i n g the s u m o f al l th e p ro du ct s an d i nt eres t ch arg es fo r al l y ears . Th i s s u m , th e d eferred t ax am ou n t , i s t hen ad d edt o th e t ax p ay er’ s i n co m e t ax fo r t he cu rren ty ear. In s h o rt , u n d er t he ex p res s t erm s o f s ect i on 1 2 9 1(a)(1 )(B), “ on l y ” cu rren t y ear PFIC g ai n s are i n cl u d edi n th e t ax p ay er’ s g ro s s i n co m e fo r t h e cu rren ty ear,
an d th e m et h o d o f t ax at i o n p res cri b edb y s ect i o n1 2 9 1 fo r n on -cu rren t -y ear PFIC g ai n s d o es n o ti n cl u d e t h em i n g ro s s i n co m e fo r an y

t ax ab l e y ear. Co n s equ en t l y , u n d er s ect i o n 1 2 9 1 n o n -cu rren t -y ear PFIC g ai n s are n o ti n cl u d edi ng ro s s i n co m e fo r an y y ear. Becau s e cu rren t -y ear PFIC g ai n s are i n cl u d ed i ng ro s s i n co m e u n d er s ect i o n 1 2 9 1 , th ey

are co un t edi n the s ect i o n 6 5 0 1 (e)(1 )(A)(i ) g ro s s i n co m e am o u n t
. Si m i l arl y , b ecau s e n on -cu rren t-y ear PFIC g ai ns are n o ti n cl u dedi ng ro ss i n co m e
u n d er s ect i o n 1 2 9 1 fo r an y y ear, n o n -cu rren t -y ear PFIC g ai n s are n o tco un t edi n g ro s s i n co m e fo r p u rp o s es o f s ect i o n 6 5 0 1 (e)(1 )(A)(i ). Onb ri ef res p o nd en t arg ues fo r a d i fferen tres u l t , co n t en d i n g th atan y n o n cu rren t -y ear PFIC g ai n i s g ro s s i n co m e an d t h ats ect i o n1 2 9 1 m erel y “pro v i d es fo r th e cal cu l at i o n o f t h e t ax an di n t eres to wedo nth atp o rt io no f g ro s s i n co m e fro m- 1 3 -

th e s al e o f t h e PFIC s t o ck[i .e., n o n -cu rren t -y ear PFIC g ai n] .” Co n s equen t l y , res p o n d en t co nt en d s , we s h o u l dad d al l n o n -cu rren t -y ear PFIC g ai n s t o th e s ect i o n 6 5 0 1 (e)(1 )(A)(i ) g ro s s i n co m e cal cu l at i o n b ecau s e s u ch g ai n s wo u ldh av e b een i n cl u d edi n “ g ro s s i n co m e” i f s ect i o n1 2 91 were n o ti n th e Co d e. Bu ts ect i on 1 2 9 1 i s i n th e Co d e, an d , as th e m o re s p eci fi c p ro v i s i o n , i t g o v ern s th e m ore g en eral t erm s o f s ect io n6 1. See D.B. v . Card al l , 8 2 6 F.3 d7 2 1 , 7 3 5 (4 th Ci r. 2 0 16 ) (“ As a ru l e o f s t atu t o ry co n s tru ct io n , * * * th e s p eci fi c t erm s
o f a s t atut o ry

s ch em e g o v ern th e g en eral o n es * * * p art i cu larl y * * * wh ere

‘ Co n g res s h as en act eda co m p reh en s i v e s ch em e an dh as d el i b erat el y t arg et ed
s p eci fi c p ro b l em s wi th s p eci fi c s o l u t i on s ’ [.] ” (qu o t i n g Rad L AX Gat eway Ho t el , LLC v . Am al g am at edBan k , 5 66 U.S. 6 3 9 , 6 4 5 (2 0 1 2 ))). Th ere i s n o ap p aren t
reas on t o d ev i at e fro m

the t ex to f s ect i o n1 2 91 , wh i ch p ro v i d es th ato n l y cu rren t y ear PFIC g ai n i s i n cl u d edi n th e t ax pay er’ s g ro s s i n co m e fo r t h e cu rren t y ear, o r t o i gn o re t he s p eci fi c m et h odem p l o y edi n s ect i o n1 2 9 1 fo r t ax i n g n o n -cu rren t y ear PFIC g ai n s , wh i ch d o es n o ti n cl ud e t h o s e g ai n s i n g ro ss i nco m e fo r an y y ear. Acco rd in g ly , we d ecl i n e t o ad o p ta read i n g o f s ect i o n s 1 2 9 1 an d6 5 0 1 t h atwo u l d d efi n e “ gro s s i n co m e” d i fferen t l y fo r p u rp o ses o f t h e s t atut e o f l i m i tat i o n s th an i t
wo u l dfo r cal cu l at i n g th e t ax o n s al es o f PFIC s t o ck s .- 1 4 -

B. Res p o n d en t ’ s Po l i cy Co u n t erarg u m en t As s ect i o ns 1 2 9 1 an d6 5 0 1 (e)(1 )(A)(i ) are cl ear, we co u lden do u r i n qu i ry h ere, b u tfo r t h e s ak e o f co m pl et en es s we s h al l ad dres s res p o n d en t ’ s p o l i cy arg u m en t , wh i ch l o ok s t o th e l eg i s lat i v e h i s t o ry o f s ect i o n1 2 9 1. Res p o n d en t
co n ten d s: Pet i t i o ners ’ p o s i t i o n wo u l dp ro du ce i n co n s i s t en to ut co m es wi th res p ectt o th e s t atu t es o f l i m i t at i on s fo r as s es si n g t ax o nth e g ai nfro m th e s al e o f d o m es t i c s t o ck v ers u s PFIC s t o ck . Pet i t i o n ers ’ p os i t i o n wo u ldm ean th ato n l y

p arto f th e g ai n t h atp et i t i o n ers real i zedfro m th e s al e o f PFIC s t o cki s g ro s s i n co m e i nthe y ear o f t h e s al e fo r p u rp o s es o f * * * [s ect i o n ] 6 5 0 1(e)(1 )(A)(i ), b u ti f, i n s t ead , th ey h ad s o l ds t o ck

o f a d o m es t i c co m

p an y , th e t o tal g ai n fro m

th e s al e wo u l d co n s t i tut e g ro s s i n co m e fo r p u rp o ses o f * * * [s ect i o n ] 6 5 0 1 (e)(1 )(A)(i ). Iti s cl ear fro m th e l eg i s lat i v e h is t o ry

th atth e PFIC ru l es were en act edt o p u tt ax p ay ers i n v es t i n g i nfo rei g nm u tu al fu n d s i n th e s am e p o s i t i o n as th o s e i n v es t i n g i nd o m es t i c m u tual fu n d s . * * * Pet i t i o n ers ’ p os i ti o n wo u l d h av e t h e en t i rel y o p p os i t e co n s equ en ce fo r p u rp o s es o f * * * [s ect i o n ] 6 5 0 1(e)(1 )(A)(i ). To b et ter as s es s res p on d en t ’ s arg um en t , s o m e b ack g ro u n dm ay b e h el p fu l
. 1 6 Th e PFIC p ro v i s i o n s (cu rren ts ect io n s 1 29 1 -1 2 9 8 ) were ad d edt o th e Co d e b y th e Tax Refo rm

Act o f 1 9 86 , Pub. L. No . 9 9 -5 1 4 , s ec. 1 2 35 (a), 1 0 0 St at . at2 5 66
- 2 5 7 4 . Befo re 1 9 8 6 fo rei g n i n v es t m en tco m p an i es , i .e., co m

p an i es th at are n o w t ax edas PFICs , were g en eral l y t ax edas fo rei gn co rp o rat io n s . Ing en eral , fo rei g n

1 6 Th e fo l l o wi n g d i s cu s s io nd o es n o t t ak e i n to acco u n t an y o f t h e recen t ch an ges t o th e Co d e en act edi n th e Tax Cu t s An dJ o bs Acto f 2 0 17 , Pub. L. No
. 1 1 5 -9 7 , 1 3 1 St at . 2 0 54 . W e d i s cu s s th e l aw as i tap p l ieddu ri n g th e y ears ati s s u e.- 1 5 -

co rp o rat i o ns are n o t t ax edb y th e Un i t edSt at es o ni n co m e fro m fo rei g ns o urces
u n l es s th ati n co m e i s effect iv el y co n n ect edt o a U.S. trad e o r b u s i n es s o r u n l es s an
an t i d eferral p ro v i s i o n ap p l i es . See s ecs . 8 8 1 , 8 8 2 , 8 8 4 , 9 5 1 . If, h o w ev er, a U.S.
res i den t recei v es d i vi d en d s fro m fo rei g nco rp o rat i o n s o r g ai n s fro m s al es o f s t o ck s i n s u ch co rp o rat io n s , an y s u ch i n co m e i s g en eral l y t ax ed . See s ecs . 8 62 (a)(2 ), 8 6 5 (a)(1 ). Co n seq uen t l y , t ax o n i n co m e t o a fo rei g nco rp o rat i o nm ay b e effect i v el y

d eferred t o t h e ex t en t(1 ) t h e fo rei g n co rp o rat i o n d o es n o th av e a t rad e
o r b u si n es s i n th e Un i t edSt at es o r i n co m e fro m U.S. s o u rces , (2 ) an t i deferral p ro v is i o n s d o n ot ap pl y , an d(3 ) earn i n g s are ret ai n edrat h er t h an p ai das d i v i d en d s t o the U.S. res i d en t s hareh o l d er. Th e t ax treat m en t o f d o m es t i c i n v es t m en tco m p an i es i s d i fferen t. Fo r
ex am p l e, a reg u lat edi n v es t m en tco m p an y (RIC) m u s tg en eral l y

d i s tri bu t e 9 0 % o f i t s o rd in ary

i n co m e each y ear t o av o i db ei n g d i s qual i fi edas a RIC (d i s qu al i fi cat i o n wo u l dres u l ti n th e ap p li cat i on o f s ub ch ap t er C o f t h e Co d e t o th e fo rm er RIC). 1 7 See s ec. 8 5 2 (a). A s h areh o l d er i n cl ud es th e am ou n to f an y

1 7 A RIC i s a d o m es ti c i n ves t m en t co m pan y th atm eet s v ari o u s s t atu t o ry cri t eri a. See s ec. 8 5 1 (a). Th e l eg i s l at i ve h i s t ory o f s ec. 1 2 91 (d i s cu s s ed i nth e n ex t few p ag es ) u s es th e t erm “ d o m es t i c i n ves t m en tco m p an i es ” rat h er th anm o re s p eci fi cal l y

referri n g t o RICs . Res p o n d en ts u g g es t s th atth e t wo t erm s are s yn o n ym o u s , an daft er rev i ewi n g th e l eg i s l at i v e h i s t o ry as a wh o l e, we ag ree t h at i n ad o pt i n g th e PFIC p ro v i s i o n s , Co n g res s was p ri m ari l y i f n o t wh o l l y

co n cern ed (co n ti n u ed ...)- 1 6 -

o rd i n ary d i s tri bu t i o n i n h i s o r h er g ro s s i nco m e i nth e y ear t h e d i s tri b u ti o ni s recei v ed(as a d i v i d en dt o th e ex t en to f t h e RIC’ s earn i n g s an dp ro fi t s ). Sec. 1 .8 52 -4 (a)(1 ), In co m e Tax Reg s .; s ee al s o s ec. 8 5 2 (c) (p ro v i d in g s p eci al ru l es fo r d et erm i n i n g th e earn in g s an dp ro fi t s o f a RIC); s ec. 8 54 (p ro v i d i n g cert ai n l i m i tat i on s wi th res p ectt o t h e t reat m en to f RIC d i v i d en d s as qu al i fi edd i v i d en d i n co m e un d er s ect i o n 1 (h )(1 1)). Ad d i t i o n al ly , a t ax i s i m p o sedatthe RIC l ev el o n
an y o rd i n ary i n co m e ret ai n ed . See s ec. 8 5 2 (b )(1 ). 1 8 Becau s e o rd in ary i n co m e i s ei th er effect i v el y

p as s edthro u gh t o th e o wn ers o f a RIC o r o therwi s e t ax edatth e
co m p an y l ev el , o pp o rtun i t i es fo r d eferral o f o rd i n ary i n co m e i na RIC are d i m i n i s h edo r el i m i n at ed
. Th e PFIC p ro v i s i o n s were ad d edt o th e Co d e as an an t id eferral p ro v i s i o n (an dal s o as a way

t o p rev en tco n v ers io no f o rd i n ary g ai n t o cap it al g ai n), g en eral l y t o ad dres s g ap s i n treat m en tb et ween fo rei g nan d d om es t i c i nv es t m en t
co m p an i es . Th e Sen at e Fi n an ce Co m m i t t ee rep o rtex p l ai n ed : Th e co m m i tt ee i s co n cern edth at U.S. p ers o n s wh o i n v es ti np as s i v e as s et s th ro u g h a fo rei g n i n v es t m en tco m p an y o b t ai na s ub s t an t i al t ax

1 7 (...co n t i nu ed ) wi th RICs o r s i m i l ar s o rt s o f en t i t i es .

1 8 M o reo ver, u n d er s ec. 4 9 8 2 a RIC i s al s o s ub jectt o a 4 % ex ci s e t ax o n9 8 % o f an y u n d i s tri b ut edcu rren t-y ear o rd i n ary i n co m e an d1 0 0 % o f an y u n d i s tri b u t ed p ri o r-y ear o rd i n ary i n co m e.- 1 7 -

ad v an t ag e v is -a-v is U.S. i n v es t o rs i nd o m es t i c i nv es t m en tco m p an i es b ecau s e t hey

av o i dcu rren tt ax at i o n an d are ab l e t o co n vert i n co m e th atwo u l db e o rd in ary

i nco m e i f recei v edd irect l y o r recei v edfro m a d o m es t i c i n v es t m en tco m p an y i n t o cap i t al g ai ni n co m e. Th e co m m i t t ee d o es n o t b el iev e t h att ax ru les s h o ul deffect i v el y o p erat e t o p ro v i d e U.S. i n v es t o rs t ax i n cen t i v es t o m ak e i n v es t m en t s o u t si d e t he Un i t edSt at es rat h er t h an i n s i d e t h e Un i t edSt at es . Inthe co m m i t t ee’ s v i ew, U.S. p ers o n s wh o i n v es ti np as si v e as s et s s h o u ldn o t b e ab le t o ach i ev e t ax d eferral ju stb ecau s e t h ey i n ves ti n t h o se as set s i n d i rect l y th ro ug h a fo rei g n co rp o rat i o n . S. Rep t
. No . 9 9 -3 1 3 , at3 9 3 -3 9 4 (1 9 8 6 ), 1 9 8 6 -3 C.B. (Vo l. 3 ) 1 , 3 9 3 -3 94 . Th e
co n feren ce co m

m it t ee rep ort , wh i ch g en eral l y fo l l o wed th e Sen at e ap p ro ach fo r t ax i n g PFICs , ex p l ai n ed th at u n d er t h e PFIC p ro v is i o n s , g ai n reco gn i zedo n d is p os i t io no f s t o cki na PFIC * * * i s co ns i d ered t o b e earn edp ro rat a o ver t h e s h areh o l d er’ s h o l di n g p eri o do f h i s i n v es t m en t . Un d er t hi s ru l e, U.S. t ax du e i nth e y ear o f d i s p o si t i o n * * * i s th e s u m o f (1 ) U.S. t ax co m p u tedu s i n g the h i g h es trat e o f U.S. t ax fo r the i n ves t o r * * * o n i n co m e at tri b u t edt o p ri o r y ears , p l u s (2 ) i n t eres t i m

p o s edo nth e d eferred t ax , p l us (3 ) U.S. t ax o nth e g ai n at tri b u tedt o t h e y ear o f d i s p o s i t io n* * * an dt o y ears i nwh i ch th e fo rei g n co rp orat i o n was n o ta PFIC (fo r wh i ch n o i n t eres ti s du e). Th i s ru l e p ro v i d es th atal l g ai nreco g ni zed* * * [i s ] treat edas o rd i naryi n co m e. * * * H.R. Co n f. Rep t . No . 9 9 -8 4 1 (Vo l. II), atII-6 4 1 (1 9 8 6 ), 1 98 6 -3 C.B. (Vo l . 4 ) 1 , 6 4 1 (em p h as i s ad ded ). As we u nd ers t an di t, res p o n d en t ’ s arg u m en ti s th at(1 ) t h e l eg i s l at i v e h i s t ory
s h o ws th atth e PFIC p ro v is i o ns were en act eds o th att ax pay ers i n ves t i n g i n fo rei g n i n v es t m en tco m

pan i es wo u ldb e t reat eds i m il arl y t o t ax p ay ers i n v es t i n g i n- 1 8 -

d o m es t ic i n v es t m en tco m pan i es an d , fo r t h i s reas o n, (2 ) s ect i o n6 5 0 1 (e)(1 )(A)(i )
s h o u ldb e i n t erp ret eds o as t o treat g ai n s fro m s al es o f PFIC s t o ck s i na way th ati s
s i m i l ar t o th e way

s ect io n 6 5 01 treat s g ai n s fro m s al es o f RIC s t o ck
. Up o n cl o se i ns p ect i o n o f s ect i on 1 2 9 1 an di t s l eg i s l at i v e h is t ory , h o wev er, i t i s n o ti m m ed i at el y ap p aren t th atth e PFIC p ro v is i o n s were en act eds o th at t ax p ay ers i n v es ti n g i n PFICs wo u l d b e t reat eds i m i l arl y t o t ax p ay ers i n ves t i n g i n d o m es t ic i n v es t m en tco m pan i es i n ev ery

res p ect . W e t h i n k an y

co rres p o n d en ce b et ween PFICs an dRICs i s s om ewh at m o re at t en u at edth an res p o n d en two u l d
s u g g es t . Fo r ex am

p l e, t h e d efi n i t io no f a PFIC (p ro v i d edi ns ect i o n1 2 9 7) d i ffers fro m th e d efi n i t i o n o f a RIC (p ro v i d ed i ns ect io n8 51 ) i nk ey res p ect s : Ing en eral , th e PFIC p ro v i s io n s ap p ly t o a ran g e o f i n t ern at io nal i n v es t m en tco m p an i es th ati s b ro ad er t h an th e ran g e o f d om es t i c i n ves t m en t co m pan i es t o wh i ch th e RIC p ro v is i o n s ap p l y . 1 9 As an ot h er ex am p l e, t he d efau l tru l es o f s ect io n1 2 9 1 d o n o t p ro v id e fo r i d en ti cal treat m en to f PFICs an dRICs . Am o n g o th er d i fferen ces , th e
en t i re am o u n t o f g ai n o n th e s al e o f PFIC s to cki s t ax edu n d er s ect i o n 1 2 9 1 as

1 9 A fo rei g n co rp o rat i o n i s a PFIC i f 7 5 % o r m o re o f th e co rp orat i o n ’ s g ro s s i n co m e fo r t h e t ax ab l e y ear i s p as s i v e o r i f t he av erag e p ercen t ag e o f as s et s h el d du ri n g th e t ax ab le y ear t h atp ro du ce o r are h el dfo r t h e p ro du ct i o no f p as s i v e i n co m e i s atl eas t5 0 %. Sec. 1 29 7 (a). Sec. 8 5 1 d o es n o tap pl y u n l es s (1 ) th e RIC el ect s, (2 ) at l eas t9 0 % o f t h e RIC’ s g ro s s i n co m e i s qu al i fy i n g i n co m e (g en eral l y : d i v i d en d s, i n t eres t , g ai n s fro m th e s al e o r d i s po s i t i on o f s to ck o r s ecu ri t i es , et c.), an d (3 ) cert ai n d i v ers i fi cat i o n req u i rem en tare m et . Sec. 8 5 1 (b ).- 1 9 -

o rd i n ary i n co m e o r atth e h i g h es to rd i n ary rat es , wh ereas RICs m ay m ak e cap i t al g ai n d iv i d en d s , s ec. 8 5 2 (b )(3 ), an ds al es o f RIC s t o ck s are g en eral l y treat edas
s al es o f cap i t al as set s, s ee s ec. 8 5 2 (b )(4 ). In th e l i g h to f s u ch d i fferen ces b et ween PFICs an dRICs , we d o ub tth ata d i rect an al o g y

can eas il y

b e d rawnb et ween the d efau l tPFIC ru l es (i .e., s ect i o n 1 2 9 1 ) an dth e ru l es ap p l i cab l e t o RICs . At m o s tthe l eg i s l at i v e h i st ory s up p o rt s a
co n cl u s i o n th atCo n g res s en act edth e PFIC ru l es as an an t i d eferral m eas u re i n
res p o n s e t o p ercei v edi n equ i t i es b et ween the t ax treat m en t s o f s hareh o l d ers o f fo rei gn i n v es t m en t co m

p an ies an ds h areh o l ders o f d o m es t i c i n v es t m en t
co m p an i es . Al th o u gh th e PFIC d efau l t ru l es m ay ap pro x i m at e t h e RIC ru l es i n cert ai n way s , th e co rres p on den ce b et w een th es e ru l es i s n ots o cl o s e t h at a d i fferen ce b et ween th o s e s ect i on s wo u l ds u g g es t s om e am b i g u i ty i ns ect i o n1 2 9 1
s u ffi ci en tt o ju s ti fy o v erri d i n g i t s p lai nm ean i n g o r t h ato f s ect i o n 6 5 0 1 (e)(1 )(A)(i ). 2 0

2 0 On e co m

m en t at o r h as s u g g es t edthatth e d efau l tru l es p ro v id edi n s ec. 1 2 9 1 were d es ig n ed to en co u rag e t h e t ax p ay er t o el ecti n t o th e al t ern at i v e QEF reg i m e p ro v i d edu n d er s ecs . 1 2 9 3 -1 2 9 5
. Bo ri s I. Bi t t k er & Lawren ce Lo kk en , Fed eral Tax at i o n o f In co m e, Es t at es , an dGi ft s , p ara. 7 0 .1 (W es t l aw 2 0 1 8 ). Co n s i d eri n g th atth e QEF al t ern at i v e u n der s ec. 1 2 9 3 wo u l dap p ear t o b e a m u ch cl o s er an al o g o f RIC t ax at i o n th an s ec. 1 2 9 1, we t h i n k thatth e co n tras tb et ween s ec. 1 2 91 an d s ec. 1 2 9 3 l en d s fu rt h er s upp o rtt o o u r co n cl u s i on th at s ec. 1 2 9 1 was n o tm ean tt o b e a p erfect ap p ro x i m at i o no f RIC t ax at i on .- 2 0 -

Fo r t h es e reas on s , we co n cl u d e t h atres p o n den t ’ s p ol icy co n cern s p ro v i d e
n o b as is fo r a d i fferen ti nt erp ret at i o no f s ect i o n s 1 2 9 1 an d6 5 0 1 (e)(1 )(A)(i ). If, as
res p o n d en t s u g g es t s , th ere are co m p et i n g p o l i cy

co n s i d erat i o n s as t o h o w th e
s t atu te o f l i m i tat i o n s s h o u l d ap p l y i nth i s co n t ex t , i t i s th e ro l e o f th e l eg i s latu re, rat h er t h ano f t h i s Co u rt , t o ev al u at e an dad dres s an y s u ch p o l i cy

co n s i d erat i o n s . C. Gro s s In co m e Co m

p u t at i o n s Pet i t i o ners ’ o ri g i n al retu rn s fo r 2 0 0 6, 2 0 0 7 , an d2 0 0 8 rep o rt edg ro s s i n co m e
o f $ 2 10 ,4 1 4 , 2 1 $ 2 3 4 ,6 8 8 , 2 2 an d$ 2 4 7,6 5 0 , 2 3 res p ect i vel y . Th erefo re, i f p et it i o n ers

2 1 Pet i t i o ners co n t en d th atth ei r o ri g i nal 2 0 0 6 retu rn rep o rt ed$ 2 1 0 ,2 1 4 i n g ro s s i n co m e. Res p o n d en tco n t en d s t h atth e co rrect am ou n ti s $ 2 1 0 ,4 14 . Aft er rev i ewi n g p et i ti o n ers ’ o ri g i n al 2 0 0 6 retu rn , we co n cl u d e t hatres p o n den ti s cl earl y co rrect
. Th e ret u rns h ows wag es o f $ 1 4 2 , 3 64 , i n t eres to f $ 1 ,6 5 1 , d i v i d en d s o f $ 5 7 9 , an dg ro s s recei p ts o r s al es o f $ 6 5 ,8 2 0 (rep ort edo n Sch edu le C, Pro fi to r Lo s s Fro m Bu si n es s ), fo r a t o t al o f $ 2 1 0 ,4 1 4
.

2 2 Pet i t i o ners co n t en d th atth ei r o ri g i nal 2 0 0 7 retu rn rep o rt ed$ 2 3 4 ,6 8 8 i n g ro s s i n co m e. Res p o n d en to bject s t o p et i t i o n ers ’ co nt en t i o n b u tth en co n t en d s th atp et i t i o n ers ’ o ri g i n al 2 0 0 7 ret u rn rep o rt ed$ 2 3 4 ,6 8 8 i ng ro s s i n co m e, i .e., th e s am e am o u n tp et i t i o n ers cal cu l at ed . Th e ret u rn s h o ws wag es o f $ 15 4 , 5 3 1 , i n t eres t o f $ 7 22 , d i v i d en d s o f $ 1 4 , g ro ss recei p t s o r s al es o f $ 7 9 ,2 9 1 (rep o rt edo n Sch edu l e C), an d l o n g -t erm cap i t al g ai no f $ 1 3 0. Th e s u m o f t h es e am o u n t s i s $ 2 3 4 ,6 8 8 . W e co n cl u d e t here i s n o g en u i n e d i s p u t e as t o thi s i s s u e.

2 3 Pet i t i o ners co n t en d th atth ei r o ri g i nal 2 0 0 8 retu rn rep o rt ed$ 2 4 7 ,3 4 7 i n g ro s s i n co m e. Res p o n d en tap p ears t o co nt en dthatth e am o u n to f g ro s s i n co m e rep o rt edwas $ 2 3 5,8 2 2 b u tel s ewh ere arg u es th at$ 2 4 7 ,4 5 1 was rep ort ed . Th e retu rn s h o ws wag es o f $ 1 6 7,3 5 5 , i n t eres to f $ 9 6 , s h o rt -t erm cap i t al g ai no f $ 1 9 9 , an d a t ax ab l e d i s tri b u t i o n fro m an i n d i vi du al ret i rem en tacco u n t o f $ 80 ,0 0 0 . Th e (co n ti n u ed ...)- 2 1 -

o m it t edfro m

g ro s s i n co m e am o u n t s ex ceed i ng $ 5 2 , 6 0 4 , $ 5 8 ,6 72 , an d$ 6 1 ,9 1 3 , res p ect i vel y , th en s ect i o n 6 5 0 1 (e)(1 )(A)(i ) ap p l ies t o ex t en dth e res p ect i ve l i m i tat i on s p eri od s. Th e p art i es ag ree t h at th e fo ll o w i n g am o u n t s o f g ro s s i n co m e
were n o t rep o rt ed o n p et i t i o n ers ’ o ri g i n al retu rn s (t h e reco rdd o es n otd i s cl o s e an y
o th er u n rep o rt edg ro s s i nco m e):

It em 2 0 06 2 0 07 2 0 0 8 Lo n g -t erm

cap i t al g ai n s $ 8 ,9 2 7 -0
- 1 $ 32 2 Sh o rt -t erm cap i tal g ai n s 2 2 1 ,6 3 8 -0
- 3 4 6 5 Cu rren t -y ear PFIC g ai n s 4 3 0 ,3 88 $ 8 ,4 3 1 1 7 ,6 1 6 In t eres t 8 ,3 79 1 7 ,9 78 1 9 ,1 6 5 Di v i den d s 3 ,4 21 1 4 ,0 95 1 , 6 63 To t al 7 2 ,7 5 3 4 0 ,5 0 4 3 9 , 2 3 1

1 Pet i t i on ers ’ o p en i n g b ri ef s t at es th atp et i t i o n ers h ad“ $ 5 2 1 o f g ai n s” wi th o u t fu rt her ex p l an at i o n . Th e p art i es ’ s t i p u l at i on s cl earl y s t at e t hatp et i t i o ners h adl o n g -t erm cap i t al g ai n o f $ 32 2 fo r 2 0 0 8. W e ad o p tth e p art i es ’ s t i pu l at i o n .

2 Th e p art i es ag ree t h atp et i t i o ners rep ort ed$ 2 5 ,5 6 1 i ns h ort t erm cap i t al g ai n o n th ei r am en d edretu rn s fo r 2 0 0 6 . Th e p art i es al s o ag ree t h at$ 3 ,9 2 3 o f th atam o u n t was fro m s al es o f PFIC s t o ck s (al l o f wh i ch was cu rren t -y ear PFIC g ai n ). Th e t ab le refl ect s th e ag reem en t

2 3 (...co n t i nu ed ) s u m o f t h es e am o un t s i s $ 2 4 7,6 5 0 . W e ad o p tth i s am o u n t as th e co rrectam o u n to n th e b as i s o f t h e s t i p u l at edreco rd
.- 2 2 -

o f t h e p art i es wi th res p ectt o th e p ro p er am o u n t o f s h o rt -t erm cap i t al g ai n (i .e., $ 2 5 ,5 6 1

! 3 ,9 2 3 ) fo r p u rp o s es o f d eci d i n g th e s ec. 6 5 0 1 (e)(1 )(A)(i ) d i s p u t e, b u t th e n o t i ce o f d efi ci en cy d o es n o ts et fo rt h an ad

j u s t m en twi th res p ectt o s h o rt -t erm cap i t al g ai n , n or h as res p on d en targ u edfo r s uch an ad ju s t m en ti nthes e p ro ceed in g s . 3 Pet i t i on ers ’ o p en i n g b ri ef s t at es th atp et i t i o n ers h ad“ $ 5 2 1 o f g ai n s” wi th o u t fu rt her ex p l an at i o n . Th e p art i es ’ s t i p u l at i on s cl earl y s t at e t hatp et i t i o ners rep ort eds h o rt -t erm cap i t al g ai n s o f $ 4 6 5 o n t h ei r am en d edretu rn fo r 2 0 0 8 . W e ad o p tthi s am o u n t
.

4 As n o t ed , $ 3 ,9 2 3 o f t h e am o u n tp et i t i o n ers rep o rt edo n th ei r 2 0 0 6 am en d edreturn as s h o rt -t erm cap i t al g ai nwas cu rren t -y ear PFIC g ai n . Th e p art i es al s o ag ree t hat$ 2 6 ,4 6 5 o f t h e am o u n t p et i t i o n ers rep o rt edo n thei r 2 0 0 6 am en d ed return as l o n g -t erm cap i tal g ai n was cu rren t -y ear PFIC g ai n . Th e t ab l e refl ect s th e s u m . Fo r 2 0 0 6 t he am o u nto f u n rep o rt edg ro s s i n co m e, $ 7 2 ,7 5 3 , ex ceed s 2 5 % o f th e g ro s s i nco m e rep o rt edo n p et i t i o n ers ’ o ri gi nal return (2 5 % = $ 5 2 ,6 04 ). Fo r 2 0 0 7 an d2 0 0 8 , th e am o u n t s o f u nrep o rt edg ro ss i n co m e, $ 4 0 , 5 04 an d$ 3 9 ,2 3 1 , res p ect i vel y , d o n o tex ceed 2 5 % o f t h e res p ect i v e am o u n t s o f g ro ss i n co m e rep o rt edo n p et i t i o n ers ’ o ri gi n al retu rn s (2 5 % = $ 5 8 ,6 72 an d$ 6 1,9 1 3 , res p ect i vel y ). Acco rd i ng l y , we co n cl u d e an dh o ldth ats ect i o n6 5 01 d o es n o t b ar
as s es s m en to f t h e d efi ci en cy wi th res pect t o 2 0 0 6 b u t d o es b ar as s es s m en to f t h e d efi ci en ci es wi th res p ectt o 2 0 0 7 an d2 0 0 8
.- 2 3 -

II. Offs et t i n g Lo s s es Ag ai n s t Gai n s Fro m Sal es o f PFIC St ock Pet i t i o ners h av e rai sed o n e arg u m en twi th res pect t o thei r d efi ci en cy fo r 2 0 0 6 . Pet i t i o n ers co n t en dth atth ei r g ai ns fro m s al es o f PFIC s t o ck s m ay b e o ffs et b y th ei r l o s s es fro m

s al es o f PFIC s t o ck s , s o as t o redu ce t h e am o un tth ati s t ax ed
u n d er s ect i o n 1 2 9 1
. Th ati s , p et i t i o n ers co n t en d t h ats ect i o n1 2 9 1 ap p l ies t o n et g ai n fro m al l s al es o f PFIC s t o ck s du ri n g the t ax ab l e y ear. Res p o n d en tco n t en d s th atl o s s es o ns al es o f PFIC s t o ck s are p ro p erl y treat ed
as ei ther l o n g -t erm

o r s h o rt -t erm

cap i t al l o s s es d ep en d i n g o nthe h o l d i n g p eri o d o f th e as s etp urs u an tt o s ect i on 1 22 2 . Res p o n d en tco n t en d s fu rth er t h atp u rs u an tt o
s ect i on 1 2 1 1 (b )(2 ), s u ch cap it al l o s s es can b e u s ed o n l y t o o ffs etcap i t al g ai n s o f th e t ax p ay er. Becau s e, i n res p o n d en t ’ s v i ew, s ect i o n1 2 91 ch aract eri zes g ai n s d eri v edfro m s al es o f PFIC s to ck s as o rd i n ary i n co m e, cap i t al l o s s es can n o tb e
u s ed to o ffs etth o se g ai n s . W e ag ree wi th res p o n d en tth ats ect i on 1 2 9 1 d o es n o tp ro v i d e fo r t he n et t i n g
o f g ai n s an dl o s s es o n d is p os i t i o n s o f PFIC s to ck . Sect i on 1 2 9 1(a)(2 ) p ro vi d es th atth e PFIC t ax ru l es ap p l y “ t o an y g ai nreco gn i zed o n s u ch d i s p o s i t i o n[i .e., o n a d i s p o s i t i on o f s t o cki n a PFIC] ”. Th e u s e o f t h e s i ng u l ar, “ an y g ai n reco g n i zed o n
s u ch di s p o s i t i o n ” (em

p h as i s ad d ed ), i n d i cat es th ats ect i o n1 2 9 1 ap p li es t o each d i s p o s i t i on o f PFIC s t o cks ep arat el y , rat h er t h an t o an an n u al ag g reg at io no f s al es- 2 4 -

o f m ul t i p l e s t o ck s . Co n s equ en t l y , s ect io n1 29 1 ap p l i es t o an y d i s po s i t i on up o n wh i ch g ai n i s reco g n ized . Sect i o n1 2 9 1 d o es n o tad dres s , an dth erefo re d o es n o t ap p ly t o , d i s po s i t io n s up o n wh i ch l o s s es are reco g n i zed
. Acco rd i n g l y , we
co n cl u d e an d h o l dth ati n ap p l y i n g th e p ro vi s i o n s o f s ect i o n 1 2 9 1 , p et i t i on ers are
n o ten ti t l edt o o ffs et g ai n s fro m s al es o f PFIC s t o ck s wi th l o s s es fro m s al es o f PFIC s t o ck s . Pet i t i o ners arg ue t h atb ecau s e t h e Co d e g en eral l y p ro v i d es fo r d edu ct i o n o f l o s s es u n d er s ect i o n 1 6 5 , we s h o u l dal l o w th em t o o ffs etg ai n s wi th l o s ses b efo re ap p ly i n g s ect i o n 1 2 9 1 as an ex cep t i o n t o th e l i t eral ap p l i cat i o no f s ect i on 1 2 9 1
. W e d i s ag ree. Pro v i s i o n fo r a d edu ct i o nel s ewh ere i n th e Co d e wo u l d n o ts up p ort
ex cl u d i n g g ai n fro m th e ap p l i cat i o no f s ect io n1 29 1
. In acco rdwi th th e fo reg oi n g an dt o g i v e effect t o th e p art ies ’ co n ces s i o n s , Deci s i o n wi ll b e en t ered
u n der Ru l e 1 5 5
.