PLR 1311014: IRS grants extra time to make a PFIC mark-to-market election

Plain-English summary

The IRS granted a corporate taxpayer's U.S. subsidiary an additional 60 days to make a mark-to-market election for stock in a passive foreign investment company. The subsidiary had not received the information needed to prepare Form 8621 by the return deadline, and its employees later mistakenly believed another firm was responsible for filing the form. The IRS concluded that the taxpayer met the rules for a reasonable extension because the late election would not lower or otherwise change the taxpayer's overall tax liability. The ruling grants more time, but it does not decide whether the subsidiary otherwise qualifies to make the election.

Ruling snapshot

• Question: May the U.S. subsidiary receive extra time to make a mark-to-market election under IRC § 1296?
• Outcome: approved.
• Key authorities: IRC §§ 1296, 1297, 6501, 6662, 6110; Treas. Reg. §§ 1.1296-1(h), 301.9100-1, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201311014 Third Party Communication: None
Release Date: 3/15/2013 Date of Communication: Not Applicable
Index Number: 1296.00-00
Person To Contact:
--------------------- -------------------------, ID No. -----------------
-------------------------- -----------------------------------------------------
-------------------- Telephone Number:
------------------------------- ----------------------
------------- Refer Reply To:
--------------------------------- CC:INTL:B02
PLR-135536-12
Date:
December 03, 2012

              ----- -------

LEGEND:
Taxpayer = ----------------------------------------------------------------------------------------------------------
----------
U.S. Person = ----------------------------------------------------------------------------------------------------------
--------------------------------------
PFIC = ----------------------------------------------------------------------------------------------------------
----------------------------------
Date 1 = --------------------------

Year 2 = -------

Year 4 = -------

State A = ---------------

Firm B = --------------------------------------------------------------

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

   This in response to a letter received by our office on August 15, 2012, submitted

by U.S. Person, requesting an extension of time under §§ 301.9100-1 and 301.9100-3
of the Procedure and Administration Regulations to make a mark to market election
under section 1296 of the Internal Revenue Code with respect to its investment in PFIC.

  The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
\fPLR-135536-12 2

support of the request for a ruling. Verification of the factual information,
representations, and other data submitted may be required as part of the audit process.

FACTS

   Taxpayer is the common parent of an affiliated group of corporations that files a

consolidated U.S. federal income tax return. U.S. Person was incorporated on Date 1
under the laws of State A and is a member of Taxpayer’s consolidated group. U.S.
Person’s activities consist of investment banking, securities and commodities trading,
capital raising, asset management, advisory, research, brokerage and other financial
services to its customers. It also executes proprietary trading strategies on its own
behalf, including offshore marketable securities of passive foreign investment
companies within the meaning of section 1297(a). During Year 2, U.S. Person
purchased securities of PFIC.

     Firm B was responsible for providing the information to U.S. Person necessary to

make a mark to market election with respect to PFIC. The information for Year 2 was
not provided to U.S. Person until Year 4. Consequently, U.S. Person lacked the
information to timely file Form 8621 and to make a mark to market election with respect
to its investment in PFIC. After receiving this information, employees of U.S. Person
responsible for preparing the tax return for Year 2 erroneously assumed that Firm B was
required to file the Form 8621 and provide copies to U.S. Person. As a result, no Forms
8621 were prepared with respect to U.S. Person’s investment in PFIC. Therefore, no
election under section 1296 to mark to market the securities of PFIC was timely filed.

   An employee of Taxpayer in reviewing the tax return and compliance discovered

that PFIC was a passive foreign investment company within the meaning of section
1297(a) and that the information to prepare and timely file the Form 8621 and to make
the mark to market election had not been received before the tax return due date for the
tax year Year 2 and subsequent years. Therefore, the Year 2 and subsequent years’
federal income tax returns did not include any Forms 8621.

  U.S. Person represents that:

  1.         As of the submission date of its request for relief, U.S. Person had not
             been notified (a) of any action taken by the IRS with respect to the
             election, (b) that the IRS had discovered its failure to properly make
             the regulatory election, or (c) that the treatment of affected items on
             the returns filed by U.S. Person was incorrect.

  2.         Government interests will not be prejudiced by virtue of granting relief
             for U.S. Person to file the election because the late election will not
             result in a lower, or different, tax liability.

\fPLR-135536-12 3

LAW

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

foreign investment company that is owned (or treated as owned under section 1296(g))
by a United States person at the close of any taxable year, the United States 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, except as provided in Treas. Reg.

§ 301.9100-3(b)(3), 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;
   (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
           (taking into account the taxpayer’s experience and the complexity of the
           return or issue), the taxpayer was unaware of the necessity for the
           election;
   (iv)    reasonably relied on the written advice of the IRS; or
   (v)     reasonably relied on a qualified tax professional, including a tax
           professional employed by the taxpayer, and the tax professional failed
           to make, or advise the taxpayer to make, the election.

\fPLR-135536-12 4

   Treas. Reg. § 301.9100-3(b)(3) provides that a taxpayer is deemed not to have

acted reasonably or in good faith if the taxpayer

  (i)     seeks to alter a return position for which an accuracy-related penalty has
          been or could be imposed under section 6662 at the time the taxpayer
          requests relief (taking into account any qualified amended return filed
          within the meaning of Treas. Reg. § 1.6664-2(c)(3)) and the new position
          requires or permits a regulatory election for which relief is requested;
  (ii)    was informed in all material respects of the required election and related
          tax consequences but chose not to file the election; or
  (iii)   uses hindsight in requesting relief.

    Treas. Reg. § 301.9100-3(c)(1)(i) provides, in part, that the interests of the

Government are prejudiced if granting relief would result in the taxpayer having a lower
tax liability in the aggregate for all taxable years affected by the election than the
taxpayer would have had if the election had been timely made (taking into account the
time value of money). Treas. Reg. § 301.9100-3(c)(1)(ii) provides, in part, that the
interests of the Government are ordinarily prejudiced if the taxable year in which the
regulatory election should have been made is closed, or any taxable years that would
have been affected by the election had it been timely made are closed, by the period of
limitations on assessment under section 6501(a) before the taxpayer’s receipt of a
ruling granting relief.

CONCLUSION

   Based on the information and representations submitted, we conclude that U.S.

Person satisfies the requirements for a reasonable extension of time to make the mark
to market election under section 1296 of the Code. Accordingly, U.S. Person 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 PFIC for Year 2 and subsequent years.

  The granting of an extension of time is not a determination that U.S. Person is

otherwise eligible to make the election under section 1296. Treas. Reg. § 301.9100-
1(a).

   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.

                                  Sincerely,

\fPLR-135536-12 5

            Jeffery G. Mitchell
            Branch Chief, Branch 2
            (International)