Foreign Private Equity distribution and reporting

[Kpeabody]

I have a (up to now) pretty standard taxpayer.

This year he notified me that he received a distribution from BSG (A UK private Equity firm). He provided the capital vs Income ratio as provided by them. 

How would I report this income? Would this just count as a dividend? 

I am familiar that if a taxpayer owns stock in a foreign mutual fund it potentially triggers 3520 filing in addition to the usually FBAR/8938 reporting. However looking around I have been seeing that they treat private equity firms differently. Does anyone have any experience this this? 

[sjrcpa]

@itonewbie 

[itonewbie]

Don't have any direct experience in foreign private equity, probably because it's not that common among individuals.  In the US, individuals would generally have to be accredited investors to participate.

Here's the way I'd look at this.  First of all, my understanding is that private equity firms in the UK are generally organized as limited partnerships, which are PTE's, just like in the US.  Assuming all partners have limited liabilities, the default classification would be an association for US tax purposes.  It would be eligible for CTB election to be treated as a partnership but I doubt the UK limited partnership would have made the election.

If the UK limited partnership is an association (i.e. a corporation) for US tax purposes, we'd then look at whether it is a CFC and whether your client is a 10% US shareholder.  If not, we'd look at whether it meets the thresholds under either the gross income or assets test to be treated as a PFIC.

It may not be that simple to determine whether the UK limited partnership is a PFIC because some private equities may actively run the assets they acquire for turnaround over a number of years while others may hold smaller stakes as long-term investments.

My take is that you have a lot of work cut out for you and you may not be able to obtain all the pertinent information from the private equity firm through your client because much of the information may be privileged and will not readily available by virtue of this being a private equity firm after all.

Depending on the size of your client's investment and scraps of information you can gather (including agreements and prospectus your client should be able to produce), you may need to make a call to the best of your ability and build a defensive position.  International information returns are a landmine for the unwary.  Not only could there be substantial monetary P&I, failure to file these information returns with complete and accurate information would also toll the SoL, as you probably already know.

[itonewbie]

Come to think of it, I'm a bit surprised that a UK private equity firm would let in retail investors who are US persons in spite of the potentially onerous compliance requirements.

Is your client a UK national and perhaps it was not disclosed that he/she is a US person?  Or maybe your client is more than just an average Joe.

[Kpeabody]

Client was a UK citizen before moving to the US several years. (this was long before he was my client however). 

Client definitely doesn't have 10% ownership so it looking like he will fall under the PFIC/Form 8621. The Distribution itself was a LTIP Distribution. The stock was obtained when he worked for the company in the past. 

With regards to the FBAR/8939 filings. My understanding is that he is in the clear for FBAR filing because the stock itself isn't in an actual account. While he would have to report the value of a foreign asset on 8938 since its under the reporting threshold he would be all set right?

[BobKamman]

Presumably client is still a UK citizen, and just here on a green card.  Sort of like the current British prime minister, before he returned for a political career.  Are you sure he doesn't have other assets and income sources in the UK?  And is he married?  What about the nationality and tax status of his spouse?

[Kpeabody]

He mentioned another account with min in it. (Pretty annoying as I always ask all of my clients if they have any foreign accounts, pensions brokerage, etc each year and he always answered no). Driving down further. But it doesn't seem like there is any other accounts/income/etc

He is married. Filing a Joint return. They both have SSN, living in the US, etc. 

Researching further it looks like the actual ownership is in a Long-term Incentive plan (LTIP). Which seems closer to a 401K or Bonus plan then actual ownership in the partnership itself. Continuing to research.