I'm preparing a return with both the sale of 1291 PFIC stock and a large foreign tax credit.
Section 1291 is pushing most of the gain from the PFIC sales with net gain off of the return, and what's left is about $2,500 of current year 1291 ordinary gain and $3,000 of mixed PFIC and U.S.-based capital loss that can be recognized. The PFIC gain and loss could be either U.S. or foreign loss depending on whether the tax treaty is invoked or not. There is other foreign income on the return, mostly from a rental property.
The 1291 tax I've calculated has been entered on line 44 and has pushed the effective rate of U.S. tax on overall taxable income up to 36.42%.
On the return I've prepared, foreign taxable income as a component of total taxable income is 26.5%, which is higher because the 1291 gain is pushed off the return. This percentage is being applied to the total tax (normal as well as 1291 tax because they're both on line 44), resulting in a very large allowance for the foreign tax credit for this return.
I'd like to know if this is all valid.
Specifically, I’m unsure:
1) whether the portion of foreign tax attributable to the gain can be apportioned to the taxpayer's passive category income although some of it may relate to the gain, which would be “income re-sourced by treaty” if it were included on Form 1116,
2) whether the gain portion of the foreign tax can be fully attributed to 2014 or whether some of it is “lost” due to its relationship to the gain income, which is deemed to have arisen in a prior period, and
3) whether the extra 1291 tax on line 44 should be taken out in computing the overall limitation for the foreign tax credit because it relates to deemed prior period income, or perhaps whether some gain should be added back to income for the purposes of Form 1116.
My sense is that some provision might require the part of the PFIC gain attributable to prior years to be added back to income for the purposes of the foreign tax credit (as is the case with the NIIT and Form 8960 under the section 1411 regulations) – however, I can find no such provision, and a plain reading of the statutes and instructions to the forms would lead me to conclude that the return is correct as prepared. Any insight on this issue?