— U.S. Citizen Abroad (@USCitizenAbroad) April 8, 2013
As this article in the New York Times demonstrates, U.S. democracy has become a “marketplace” where votes are bought and sold. In other words, the legislative agenda is driven by special interests and money.
The last major U.S. tax reform was in 1986. That was the year that the PFIC was introduced. It is likely that the PFIC legislation was largely driven by mutual fund lobbyists who wanted to keep “Homelanders” investing in the United States. Nobody could have seen (at least I hope) the severe, punitive consequences of the PFIC rules on U.S. citizens abroad and on their countries of residence.
The PFIC rules may well have been originally intended to prevent “Homelanders” from investing in foreign mutual funds. Their primary effect is now to punish U.S. citizens abroad and extract wealth (in the form of penalties) from their counties of residence.
During this era, the Chair of the Senate Finance Committee was Senator Bob Packwood of Oregon. What was the original intent of PFICs? Were they intended to apply to the mutual fund holdings of U.S. citizens abroad? I am sure the answer is NO they were not originally intended to punish U.S. citizens abroad. To this day there are no IRS regulations that specifically state that Canadian mutual funds are PFICs.
“However, you need to look further. In 1991, twenty-one years ago, the I.R.S. published proposed regulations on PFICs which have never been finalized. The proposed regulationsare not binding on taxpayers. They are considered a body of informed judgment but accorded no more weight than the I.R.S.’s litigation position. The proposed regulations are where the bulk of the rules related to PFICs are located.”
As a result of the 2010 IRS policy review, the IRS issued Chief Counsel Advice 201003013, stating Canadian mutual funds should be classified as corporations for U.S. tax purposes. Therefore, if an American citizen receives income from a PFIC or sells a Canadian mutualfund that is a PFIC, U.S. tax and interest penalties could apply.
Imagine that! The IRC does NOT specifically include Canadian mutual funds in the definition of PFICs. The IRS has NOT published regulations including Canadian mutual funds as PFICs. Yet because of a 2010 ruling by an IRS counsel, Canadian mutual funds have been retrospectively defined as PFICs.
(Those willing to invest the time, should read what shows up when “Bob Packwood PFICs” is searched. At at minimum you will see how Tax Reform hearings work.)
Another very sad case of “unintended consequences” from 1986
Suicide Note of Joseph A. Stack III Cited 1986 Tax Law: nyti.ms/110lblw – Remember this while tax reform is going on!
— U.S. Citizen Abroad (@USCitizenAbroad) April 11, 2013
NobleDreamer posted the story of Joe Stack. Eventually the frustration of dealing with U.S. tax laws drove him to suicide. He flew a plane into an IRS building in 2010. This was the result of a law passed for the benefit of a special interest group at the expense of the average American.
The New York Times reported that:
The law, known as Section 1706 of the 1986 Tax Reform Act, made it extremely difficult for information technology professionals to work as self-employed individuals, forcing most to become company employees.
Many software engineers and other such professionals say that the law denies them the opportunity to become wealthy entrepreneurs and that it makes it harder to increase and refine their skills, eventually diminishing their income.
Harvey J. Shulman, a Washington lawyer who represented companies that supported the desires of software engineers to be independent contractors, estimated that the law currently affects at least 100,000 such people.
“This law has ruined many people’s lives, hurt the technology industry, and discouraged the creation of small, independent businesses critical to a thriving domestic economy,” Mr. Shulman said in an interview Thursday. “That the law still exists — even after its original sponsors called for its repeal and unbiased studies proved it unfairly targeted a tax-compliant industry — shows just how dysfunctional and unresponsive Democratic and Republican Congresses and our political system have been, even on relatively simple issues.”
The law was sponsored by Senator Daniel Patrick Moynihan, Democrat of New York, as a favor to I.B.M., which wanted a $60 million tax break on its overseas business.
Under budget rules in effect at the time, any tax breaks had to be paid for with new revenues. By requiring software engineers to be employees, a Congressional report estimated, income and payroll taxes would rise by $60 million a year because employees had few opportunities to cheat on their taxes.
This reminds me very much of the PFIC rules!
Have a look Commissioner Shulman’s comments on Joe Stack and offshore tax evasion beginning a the 3 minute mark.