Hi athgeneva. I spent a lot of time researching this. I talked to the IRS a few times via their 1-800 number, but we never contacted a tax advisor. The IRS told me that distributions from Swiss pensions are considered income. As advised by the IRS, we reported the total distribution on line 16a of our 2011 1040. This was the "Avoir de libre passage" I mentioned previously. We also had to fill out line 16b, which is the taxable amount. The IRS told me to take the total, subtract the cost (i.e., her contributions to the pension), and report the rest on 16b. Unfortunately, we didn't have a complete history of her account, so we had to make a best guess. One of her statements showed her contributions and her employers' contributions separately, so we used the amount from that statement as her cost. As I said, the total, minus that cost, is the taxable amount, which we reported on line 16b. Basically, her employers' contribution and all interest was reported to the IRS. We reported the same amounts to Massachusetts for our state returns. Both our federal return and our state return were accepted, but who knows if we'll be audited in the future.
A lot of people claim that the IRS doesn't recognize Swiss pensions and therefore they are not taxed, but that isn't true from what I've read of the US-Swiss tax treaty and from what the IRS agents told me. It's possible that we overestimated the taxable portion, but we figured what we did was safest. Also, for us, because there wasn't that much money in her pension, the end result wasn't much different if we changed the math.
Let me know if you discover anything different. Good luck!