Exiting Stocks and Shares ISA - PFIC, 8621, and what to do next

Greetings Everyone,

I'm looking for a little help in how best to correct a boneheaded mistake that I recently made.  I'm a US/UK dual citizen and just a month ago decided to broaden my investments, so moved some money from a cash-ISA into one for stocks and shares.  It was only after I did this that I found out that each fund is considered a separate PFIC and that this should be avoided at all cost.  My problem breaks down into two areas – where to move the money, and how to report the PFICs for this financial year.

As to the first issue, my money is with Fidelity UK, and seeing that they also offer a Share Dealing ISA, I contacted them to ask whether it's possible to move a Stocks and Shares ISA into one of these accounts.  It is, but only in the next UK financial year (e.g. after 6 April 2014).  Am I correct in thinking that if I do this, I'll be able to take advantage of the UK ISA tax incentive, and will be able to report the proceeds as normal stock transactions on my US IRS return?  I know I'll lose the stability that funds offer over individual stocks, but it seems that this is the only way to invest while keeping on the good side of the IRS.

As to reporting the stocks and shares funds, I know that I'll have to include a form 8621 for each fund in my 2014 return.  I've had a good look at the rules, and while they are maddening, it seems that because I am investing and divesting in the same US tax year, I'm saved a little bit of headache.  From my reading, it seems like I should fill out Part 1 of 8621, and then skip to Part 5, where I note the gain on line 15f, attach the statement called for in 16a, note the amount again in 16b (being the full amount because of the same financial year), and add that accumulated funds to my “other income” on my 1040.  Does this make sense, and/or am I missing anything?  I plan to note in each statement that each investment/divestment was within the calendar year so that I wouldn't have to fill these out again in the future.

As to other forms, I know this will have to be noted in my FBAR, and know that I am below the threshold for the 8938, and so that I won't have to fill this out.  I am less certain, though, about forms 3520 and 3520a.  I'm rather swayed by Phil Hodgen's argument that ISAs aren't a trust <http://hodgen.com/is-an-isa-a-foreign-trust/>, but I know my opinion makes little difference to the IRS if they decide I'm mistaken.  Does anyone have any advice?

Many thanks for any of you who have taken time to read all of this.  I think I'm off to lie in a darkened room with a cool cloth on my forehead!

I don't think you need to bother with the trust stuff.

By selling your ISA funds you are "marking to market" so it should be as simple as PFIC can be.

If you have individual stocks in the ISA you will have to pay US tax on all dividends and capital gains.

And because you have less than $25,000 of PFICs and sold them in the same year you are exempt from filing PFIC forms; so you just have Schedule D and Form 8938 and FinCEN 114 to cope with.

Nun and Guya,

Many thanks for your prompt replies.  You pretty much confirm what I was thinking, and have helped put my mind at ease.

I have one follow-up issue.  My total investment is above $25,000, but no one fund is anywhere near this amount.  (We have set up accounts with my wife's ISA in a similar manner, so we even go over the joint threshold of $50,000.)

Reading the form 8621 instructions, it seems that the limit is for each individual PFIC, but it is worded so ambiguously that I cannot be certain that it does not mean all PFICs added together.  Also, this limit only seems the affect the filling out of completing Part I, and that I'd still have to fill out Part V for each account anyway.  My thinking is that since I'll have the section I information for each fund, that I'll err on the side of caution and fill out the appropriate information just to be safe.  Does this make sense?

Again, many thanks for your help!

The final regulations were only published by the US Treasury on December 30, 2013 but Reg 1.128-1T(c)(2)(i) looks as if the $25,000 limit is only met if the shareholder's aggregate holdings exceed this limit at the end of the tax year.