I sold shares of a PFIC which was treated as section 1291 (excess distribution regime). The gains from the sale are considered excess distribution subject to deferred taxes and interest. Section 1291 treats those gains in two different ways: one part (non-excess distribution) is considered ordinary income, and the other (excess) is taxed at the highest tax rate (37%) and is subject to interest penalty. This second part is not considered part of the Adjusted Gross income.
Since I am a resident of a country that has a tax treaty with the US to avoid double taxation, and the treaty says that all capital gains must be sourced to the country I reside in, all those gains from the PFIC should be considered foreign source, and therefore I should be able to claim an FTC on that income (both excess and non-excess). There is a conflict here between the IRS treatment of the excess distributions (not considered income) and the tax treaty that sources it as foreign income as otherwise I would be double taxed on those gains.
However, since the excess part is not considered part of the AGI, line 18 of form 1116 does not include it.
Is there a way to modify line 18 of form 1116 for this type of situations?
