PFIC §1291 Calculation Explained — Form 8621 Line 16a Technical Reference

This reference describes how the PFIC calculator on pfic.xyz implements the default-taxation rules of 26 U.S.C. §1291 for excess distributions, including per-block computations, the income-inclusion rule, foreign-currency determinations, historic highest rates, and Form 8621 (Rev. 12-2024) Instructions for Line 16a workpapers.

All citations below reference the Internal Revenue Code (IRC) and the official IRS Form 8621 instructions. Quotations are attributed and linked to their authoritative sources.

0 — When an “Excess Distribution” Occurs

Under §1291, an excess distribution arises in two principal situations:

1. Disposition of PFIC stock (sale or other disposition).
   IRC §1291(a)(2) applies the excess-distribution regime to any gain on the disposition of PFIC stock “as if such gain were an excess distribution.” In practice, the entire gain from a PFIC disposition is processed under §1291, regardless of size.
2. Dividends exceeding the 125% threshold.
   IRC §1291(b)(2) defines the excess portion as the amount by which the current-year distributions exceed 125% of the average distributions received during the three preceding taxable years (or the shorter holding period). Correctly determining this threshold across multiple lots and currencies is frequently the most demanding part of a §1291 computation.

1 — Per-Block Computation (Not Account Totals)

Determinations must be made on a share-by-share basis, with permission to aggregate only shares that have the same holding period:

IRC §1291(b)(3)(A): “Determinations under this subsection shall be made on a share-by-share basis, except that shares with the same holding period may be aggregated.” Source

Consistent with the Form 8621 instructions for Part V, if distributions involve shares with different holding periods, Lines 15a–15e must be computed separately for each block (a set of shares with the same holding period). Mixing periods or using account-wide totals distorts Lines 15f and 16, especially with reinvestments and multi-currency positions. See Instructions for Form 8621 (Rev. 12-2024), Part V.

2 — “Only Amounts Already Included in Income” Rule

Not every past distribution is eligible when computing the 125% average. Only amounts that were actually included in income can be used. After an excess distribution is allocated by day across the holding period:

• Amounts allocated to the current year and pre-PFIC years are included in current gross income, per §1291(a)(1)(B).
• Amounts allocated to PFIC years are not included in income; instead they are subject to the separate tax and interest charge under §1291(c). See Form 8621 Instructions, Line 16 guidance.

Therefore, when computing the next year’s Line 15b average, include only the portions previously recognized in income. Excluding deferred amounts is essential to avoid overstating the 125% threshold.

3 — Foreign-Currency Determinations (Order Matters)

IRC §1291(b)(3)(E): “If the distributions are received in a foreign currency, determinations under this subsection shall be made in such currency, and the amount of any excess distribution … shall be translated into dollars.” Source

The sequence is strict: first perform the 125% test and determine any excess in the original currency; only then translate the confirmed excess distribution into USD for tax and interest purposes. Reversing this order can misclassify excess amounts due to FX effects. Maintain original-currency workpapers (for Lines 15f and 16) with exact FX dates and sources.

4 — Annual Allocation, Highest Rates, and §6621 Interest

4.1 Highest Rate of Tax per Year

IRC §1291(c)(2): “The portion of the excess distribution allocated to each prior year shall be subject to tax at the highest rate of tax in effect under section 1 or 11 for such taxable year.” Source

For each prior-year allocation, recompute tax using that year’s highest applicable rate (individual under §1 or corporate under §11). For individuals, the Form 8621 instructions publish historic top rates (see p. 14 of the Instructions), which feed the “additional tax at the highest rate.”

4.2 Interest Computation

IRC §1291(c)(3): “The interest shall be determined by using the rates and methods under section 6621 … from the due date for the return for such prior year to the due date for the return for the current year.” Source
Form 8621 Instructions, Line 16f: “The amount of interest is determined by using the rates and methods under section 6621.” Instructions

Interest runs daily from each prior year’s return due date (plus one day) to the current return’s due date, using quarterly §6621 rates with daily compounding. Portions already included in income for current or pre-PFIC years do not accrue interest.

5 — Accuracy Checklist (Form 8621 Part V)

• Per-block method — compute Lines 15b–15e separately for each holding-period block; never use account-wide totals.
• Income-only average — only previously included-in-income amounts can enter the 125% average.
• Currency order — determine excess in original currency first; translate afterward.
• Historic highest rate — apply the correct §1/§11 top rate for each prior year.
• §6621 interest — daily compounding, quarter-specific rates, from prior-year due date + 1 day.
• Line 16a workpapers — maintain per-block × per-year schedules, in original currency with FX proofs.

Summary

The difficulty of a PFIC §1291 computation lies in the structure rather than any single formula: Per-block segmentation → Income-only averages → Original-currency determinations → Historic rates + §6621 daily interest.

Without a professional PFIC calculator that reproduces these statutory steps and generates audit-ready Form 8621 Line 16a workpapers, even advanced spreadsheets are unlikely to meet IRS-accurate standards.