PLR 1244003: IRS grants more time for a PFIC mark-to-market election

Plain-English summary

A regulated investment company failed to identify two foreign corporations as passive foreign investment companies and did not make the IRC § 1296 mark-to-market elections for the prior tax year. The IRS granted the company a 60-day extension to make those elections after finding that the requirements for relief under Treas. Reg. § 301.9100-3 were satisfied. The ruling was based on the company’s representations that it acted reasonably and in good faith and that relief would not prejudice the government’s interests. The extension applies to the stock of the two identified foreign corporations for the specified tax year.

Ruling snapshot

• Question: May the taxpayer receive more time to make IRC § 1296 mark-to-market elections for two PFICs?
• Outcome: Approved
• Key authorities: IRC § 1296; Treas. Reg. §§ 1.1296-1 and 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201244003 [Third Party Communication:
Release Date: 11/2/2012 Date of Communication: Month DD, YYYY]
Person To Contact:
Index Number: 9100.22-00, 1296.00-00, -----------------, ID No. -------------
855.01-00 Telephone Number:
--------------------
---------------------------- Refer Reply To:
-------------------------------------------- CC:INTL:B02
------------------------------ PLR-104735-11
------------------------------ Date:
July 27, 2012

               TY: --------

Legend

Taxpayer = --------------------------------------------
-----------------------
State X = ------------
Funds = ---------------------------------------
Adviser = ----------------------------------------
-----------------------
B = ----------------------------------------------
-----------------------
Accounting Firm = --------------------------
Year 1 = -------
FC1 = ---------------------------------------
FC2 = ---------------------------

Dear --------------------:

   This is in response to a letter received by our office on February 3, 2011,

submitted on behalf of Taxpayer by its authorized representative, requesting an
extension of time under Treas. Reg. §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make a mark to market election under I.R.C. § 1296.

   The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for rulings, it is subject to verification on
examination.

FACTS

PLR-104735-11 2

    Taxpayer is State X corporation and is registered as an open-end management

investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et
seq., as amended (the 1940 Act). Taxpayer is a diversified series of Funds. Taxpayer
is a “fund” as defined in section 851(g)(2), and accordingly is treated as a separate
corporation for federal income tax purposes pursuant to section 851(g)(1) (except with
respect to the definitional requirement of section 851(a)). Finally, Taxpayer is taxed as
a regulated investment company under subchapter M of the I.R.C.

    Taxpayer is managed by Adviser and Taxpayer has contracted B to provide it

with certain administrative services and facilities. B is responsible for, among other
things, assisting in the preparation of Taxpayer’s filings required to maintain Taxpayer’s
qualifications and to satisfy applicable federal and state tax requirements. To provide
such services, B employs tax accountants who are competent to render tax advice with
respect to stock ownership of a foreign corporation and, in particular, are highly
experienced in preparing income and excise tax returns and in recommending relevant
tax elections to Taxpayer.

    For Year 1, Adviser, despite the assistance from Accounting Firm, failed to

identify FC1 and FC2 as passive foreign investment companies (“PFICs”). As a result,
B failed to make the mark to market election under section 1296 for Year 1 with respect
to FC1 and FC2 and failed to advise Taxpayer of the consequences of making or failing
to make such an election.

  Taxpayer has submitted affidavits from its Assistant Treasurer and Director –

Fund Tax, in support of this ruling request.

  Taxpayer has made the following additional representations:

  1.         The request for relief was filed by Taxpayer before the failure to make
             the regulatory election was discovered by the IRS.

  2.         Granting the relief will not result in Taxpayer having a lower tax liability
             in the aggregate for all years to which the regulatory election applies
             than Taxpayer would have had if the election had been made timely
             (taking into account the time value of money).

  3.         Taxpayer did not seek to alter a return position for which an accuracy-
             related penalty has been or could have been imposed under section
             6662 at the time it requested relief and the new position requires or
             permits a regulatory election for which relief is requested.

PLR-104735-11 3

   4.        Taxpayer did not choose to not file the election after being fully
             informed of the required regulatory election and related tax
             consequences.

   5.        The elections requested will not affect any closed tax year.

   6.        Taxpayer is not using hindsight in requesting relief under Treas. Reg. §
             301.9100-3 and no specific facts have changed since the due date for
             making the elections which would make elections advantageous to
             Taxpayer.

LAW

   Section 1296(a) provides that, in the case of marketable stock in a passive

foreign investment company that is owned by a United States person at the close of any
taxable year, the person may elect to include in gross income the excess of the fair
market value of the stock over its adjusted basis.

   Treas. Reg. §1.1296-1(h) provides that an election under section 1296 for a

taxable year must be made on or before the due date (including extensions) of the
person’s U.S. income tax return for that year.

    Treas. Reg. §301.9100-1(c) provides that the Commissioner has the discretion to

grant a taxpayer a reasonable extension of time, under the rules set forth in Treas. Reg.
§301.9100-3, to make a regulatory election under all subtitles of the Code, except
subtitles E, G, H, and I.

     Treas. Reg. §301.9100-1(b) provides that an election includes an application for

relief in respect of tax, and defines a regulatory election as an election whose due date
is prescribed by a regulation, revenue ruling, revenue procedure, notice, or
announcement.

   Treas. Reg. §301.9100-3(a) provides that requests for relief will be granted when

the taxpayer provides the evidence (including affidavits described in Treas. Reg.
§301.9100-3(e)) to establish to the satisfaction of the Commissioner that the taxpayer
acted reasonably and in good faith, and the grant of relief will not prejudice the interests
of the Government.

  Treas. Reg. §301.9100-3(b)(1) provides that a taxpayer is deemed to have acted

reasonably and in good faith if the taxpayer:

   (i)    requests relief before the failure to make the regulatory election is
          discovered by the IRS;

PLR-104735-11 4

   (ii)    failed to make the election because of intervening events beyond the
           taxpayer’s control;
   (iii)   failed to make the election because, after exercising reasonable diligence,
           the taxpayer was unaware of the necessity for the election; or
   (iv)    reasonably relied on a qualified tax professional, and the tax professional
           failed to make, or advise the taxpayer to make, the election.

CONCLUSION

  Based on the information and representations submitted, we conclude that

Taxpayer satisfies the requirements for a reasonable extension of time to make the
mark to market election under section 1296 of the Code. Accordingly, Taxpayer is
granted an extension of time of 60 days from the date of this letter to make the election
under section 1296, with respect to the stock of FC1 and FC2, for its taxable year
ending on December 31, Year 1.

   This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3)

of the Code provides that it may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to taxpayer’s first representative.

                                   Sincerely,



                                   Jeffery G. Mitchell
                                   Branch Chief
                                   (International)

cc: