QUESTION: I am hoping you can point me in the right direction. I live
in the US and belong to a couple of private investment clubs outside
the US. I am trying to find out if I have to report income gained from
the investments these clubs have made. The clubs do not supply any
forms for this purpose and I can't seem to find the information I am
after at the IRS website. Do you know how I can find out what I need
to know? Thank you so much - I appreciate any help you can give me.

REPLY: There are two types of investment clubs. The first is simply an
educational discussion group where the individual members execute
their own investments in their own name. The second and more common
type is a club where members contribute a fixed amount each month and
the group makes investments of those funds based on decisions of the
club members. For more information on such clubs see the Nat. Ass'n of
Investment Clubs web-site at
http://www.better-investing.org/Public/default The second type of
investment club in the U.S. is treated as a partnership and the Club
officers are required to prepare a partnership tax return (Form 1065)
with a Form K-1 for each member/partner that sets forth each member's
share of the income and any deductions or credits.

Based on the very limited information you have provided, it appears
that you have either invested in a foreign partnership or in a passive
foreign investment company. If the "investment club" (as you call it)
is a corporation or an international business company (IBC) or a
foreign LLC then it is a PFIC (passive foreign investment company) and
you will be subject to the rules described at
http://www.offshorepress.com/offshoretax/otpfic.htm If the
"investment club" is a foreign partnership, then you would be subject
to the rules described at
http://www.offshorepress.com/offshoretax/otpartnr.htm

If the clubs are corporations or IBCs or LLCs, you are not obligated
to report undistributed income until you (1) receive a distribution of
income or (2) dispose of your shares in the "club". But when
distributions are made or when you dispose of any shares, there is a
complex calculation that must be made to allocate the gains (if any)
to all of the years the club shares were held and to compute a tax for
each year based on the highest rate in the tax tables for each year.
(I'm assuming the clubs have not made any elections to be treated as
partnerships for U.S. tax purposes.)

If you are sure the "clubs" are not incorporated in any manner, the
IRS would say you are required to file a Form 8865 for a foreign
partnership. But it seems apparent that you would not have -- or be
able to get -- the financial details needed to file that form. The
only other option that I can think of is to report your share of any
income or gains on your tax return and to attach an explanation that
you are a minority member of an unincorporated foreign investment club
and can't secure the data needed to file Form 8865. Penalties for not
filing this form can be waived (at the discretion of the IRS) if you
have reported your income from the club and have made an effort to
comply with the filing requirements but are unable to do so.

The comments in this memorandum are not intended to constitute an
opinion regarding any specific tax issues because additional tax
issues may exist that could affect the tax treatment of the tax issues
addressed in this memo. This memorandum does not consider or reach a
conclusion with respect to those additional issues and was not written
and cannot be used for the purpose of avoiding penalties under code
section 6662(d). For further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm

Vern

P.S. If you like this service, please spread the word.