UK employer pension, is it possible to selectively apply the Treaty?

2014 was the first year that I contributed to a UK employer pension. This means I need to consider how to treat it for US tax purposes. I've also got a bundle of unused FTCs carried over from prior years that I need to start thinking about using before they expire.

The strategy that gives the best result for me is to elect Treaty protection for gains (Article 18(1)) but not for contributions (Article 18(5)). My excess FTCs are used to pay the notional US tax due on the money that my employer and I contributed to the pension, thereby building up a US tax free basis for future use. The IRS is also prevented from looking at the PFICs within the pension.

Because there is a lot of disagreement on the subject of UK pensions and the IRS has not provided much guidance, I was thinking to file a Form 8833 disclosing the existence of the pension and stating clearly which provisions I am electing to use and not use. The IRS can then decide whether they disagree with the position I've taken. My response if they did disagree would be to file an amended return electing into Article 18(5) as well. If I had to do this, my tax wouldn't change, but would there be any penalty due? I assume I'd be no worse off than if I'd filed that way to begin with, but am I missing anything?

When a taxpayer files with a treaty-based position, does the IRS have the usual 3 years to raise any objections, or is there anything that would cause the statute of limitations to remain open longer?

In general, is it permissible to elect into some Treaty provisions but not others, or do you have to go whole hog?

I will also be disclosing the pension on my FBAR, but do not need to file Form 8965 (I'm under the threshold).

Thanks for any feedback.

Probably not.  See CCA 200612013 (http://www.irs.gov/pub/irs-wd/0612013.pdf) ("taxpayers may not "cherry pick" among the provisions of the Code and the income tax treaties to which the United States is a party.").

Thanks. Interesting document you found.

I would be interested to hear how far you think the no cherry picking rule goes. In the opinion you linked to, the taxpayer was trying to use the treaty inconsistently in respect of the same item of income. There's an argument to be made that contributions to a pension (employment income) and gains within the pension (investment income) are distinct enough that you can elect different treatment for them.

The IRS counsel also mentions that the no cherry picking rule is intended to prohibit taxpayers from taking positions that would contravene the intent of the Treaty or of the tax code. There's an interesting wrinkle here in that Article 18(5) is very narrowly drafted to apply only to employer pensions and only while the individual continues to be employed - all other pensions are out of scope. The scenario where contributions are non-deductible (and basis is generated) but gains are protected is therefore explicitly available to taxpayers with employer pensions once they leave the employer if they apply the Treaty across the board. This provides some evidence that the Treaty intended for individual taxpayers broadly speaking to be subject to that regime and supports a taxpayer arguing, in essence, for the ability to make selective treaty claims where the result is the precise outcome that the Treaty intended in general.

These are just some thoughts now that I have had a chance to digest the document provided by discly and I would be interested in any further feedback.

I am not really sure how far-reaching this rule is.