I am looking at an investment in a passive foreign invesment company (PFIC), and the implications of this are explained on the company's web page here:
My first question is why does the U.S. not treat such companies as ordinary corporations distributing qualified dividends? Is it simply because they invest in assets like airplanes that are held for a long term? It seems awfully discriminatory against such companies to treat their earnings as ordinary income. And why create such hellish complexity for ordinary shareholders?
Second, if I take the QEF election as I read it I pay tax based on actual earnings rather than distributions. If the company distributes nothing, I pay tax based on the earnings anyway, and I get to increase my tax basis. What is less clear is what happens if the company pays out *more* dividend than it reports as earnings? In this case do I pay tax based on the earnings, but not get taxed on the difference and simply decrease tax cost basis in the stock for the difference? In such case what would happen in a future year when the tax cost basis in the stock goes to zero?
Third, does any of this hideousness get less complex if I buy the stock in an IRA account, or are there still requirements to pay out tax for IRAs (with or without the QEF election)?