IRS grants extra time for a PFIC mark-to-market election

Plain-English summary

The IRS considered a regulated investment company's late election to use the mark-to-market method for stock in a passive foreign investment company. The fund's tax adviser did not identify the foreign corporation as a PFIC when preparing four years of returns, so the fund did not make the § 1296 election. The IRS found that the fund reasonably relied on qualified tax professionals, acted in good faith, and would not receive an aggregate tax benefit from the late election. It granted 60 days to make the election for the four affected tax years. The ruling did not decide whether the fund otherwise satisfied the substantive requirements of § 1296 or qualified as a regulated investment company.

Ruling snapshot

• Question: Could the fund receive extra time to make its late § 1296 mark-to-market elections?
• Outcome: Approved, 60-day extension granted
• Key authorities: IRC §§ 1296, 6501, 6662, and 6110; 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: 201408015 Third Party Communication: None
Release Date: 2/21/2014 Date of Communication: Not Applicable
Index Number: 9100.22-00, 1296.00-00
Person To Contact:
------------------------------- ---------------------
-------------------------------------------------- ID No. ------------------

---------------------------------------------- Telephone Number:
----------------------
Refer Reply To:
CC:INTL:B02
PLR-123914-13
Date:
November 15, 2013

     TYs: ---------------------------------------

Legend

Fund 1 = -----------------------------------

Trust 1 = --------------------------------
FC1 = -----------------------------------------
State A = ---------------------
Advisor A = ----------------------------------------------
Individual 1 = --------------------------
Date 1 = ---------------------------
Date 2 = ---------------------------
Date 3 = ---------------------------
Date 4 = ---------------------------
Date 5 = ------------------------
Date 6 = ---------------------------

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

 This is in response to a letter received by our office on April 17, 2013, submitted on
 behalf of Fund 1 by its authorized representative, requesting an extension of time
 under Treas. Reg. §§ 301.9100-1 and 301.9100-3 to make a mark to market
 election under Section 12961.

 The ruling contained in this letter is based upon information and representations
 submitted by the taxpayer and accompanied by a penalty of perjury statement

1
Unless otherwise indicated, all Section references are to the Internal Revenue Code in effect as of the
date of this ruling, or to Treasury regulations promulgated thereunder.
PLR-123914-13 2

executed by an appropriate party. While this office has not verified any of the
material submitted in support of the request for ruling, it is subject to verification on
examination.

FACTS

Fund 1 is a non-diversified series of Trust 1. Trust 1 is a State A trust registered as
an open-end management investment company under the Investment Company
Act of 1940, as amended, and its shares are registered under the Securities Act of
1933, as amended. Each series of Trust 1, including Fund 1, is taxed as a
regulated investment company (“RIC”) under Subchapter M of the Internal Revenue
Code.

Fund 1 acquired shares of FC1 during its taxable year ended Date 1 and
continuously held such shares (together with additional shares of FC1 purchased
by Fund 1 subsequent to Date 1). Fund 1 sold all of its shares of FC1 in tax year
ended Date 6.

Advisor A was for all times during the years at issue responsible for, among other
things, the preparation of Fund 1’s income tax returns, including the preparation
and filing of a mark to market election pursuant to Section 1296(a). Advisor A
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
recommending relevant tax elections to Fund 1 with respect to PFICs. Accordingly,
Fund 1 relied upon Advisor A to identify the holdings of Fund 1 that qualify as
PFICs.

At the time Fund 1 filed its Form 1120-RIC for its taxable years ending on Date 1,
Date 2, Date 3, and Date 4, Advisor A had not identified FC1 as a PFIC. As a
result, Fund 1 did not make a Section 1296 election with respect to FC1. On or
about Date 5, Advisor A determined that FC1 was a PFIC.

Fund 1 has submitted an affidavit from Individual 1, who serves as Fund 1’s
Treasurer, in support of this ruling request.

Individual 1, on behalf of Fund 1, has made the following additional representations:

  1. Fund 1 is not aware of any knowledge on the part of the Service of Fund 1’s
     failure to make the mark to market elections discussed herein.
  2. Granting the relief will not result in Fund 1 having a lower tax liability in the
     aggregate for all years to which the regulatory election applies than Fund 1
     would have had if the election had been made timely (taking into account the
     time value of money).
  3. Fund 1 is not seeking to alter a return position for which an accuracy-related

PLR-123914-13 3

     penalty has been or could have been imposed under Section 6662 of the
     Code.
  4. Being fully informed of the election described in Section 1296(a) and related
     tax consequences, Fund 1 did not choose to not file the election with respect
     to its holding of shares of FC1 for its taxable years ended Date 1, Date 2,
     Date 3, and Date 4. Fund 1 was not aware that the FC1 stock was PFIC
     stock and Advisor A did not advise it of such.
  5. The proposed elections will not affect any closed tax year (except the
     taxable year ended Date 1).
  6. Fund 1 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 the elections advantageous to Fund
     1.

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
responsibly and in good faith if the taxpayer
PLR-123914-13 4

  (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, 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, and the tax professional
          failed to make, or advise the taxpayer to make, the election.

Treas. Reg. § 301.9100-3(b)(3) provides that a taxpayer will not be deemed to have
acted reasonably and 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 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. If specific facts have changed since
          the due date for making the election that make the election advantageous
          to a taxpayer, the IRS will not ordinarily grant relief.

Treas. Reg. § 301.9100-3(c)(1) provides that the granting of relief may prejudice
the interests of the Government if

  (i)     granting relief would result in a 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); or
  (ii)    the taxable year in which the regulatory election should have been made
          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 under this section.

RULING

Based on the facts and representations submitted, including the representations
that the taxpayer requested relief before the failure to make the mark to market
election was discovered by the IRS and the taxpayer reasonably relied on qualified
tax professionals that failed to advise the taxpayer to make the mark to market
election, and the representation that granting relief would not result in a taxpayer
having a lower tax liability in the aggregate for all taxable years affected by the
PLR-123914-13 5

election (including Year 1), had the election been timely made, we conclude that
the requirements are satisfied for granting a reasonable extension of time to make
the election under Section 1296 for Fund 1. Accordingly, you are granted an
extension of time of 60 days from the date of this letter to make the election under
Section 1296 with respect to Fund 1’s federal income tax return for taxable years
ending Date 1, Date 2, Date 3, and Date 4.

This ruling is limited to the timeliness of filing elections under Section 1296. Except
as specifically ruled upon herein, we express no opinion concerning any federal
excise or income tax consequences relating to the facts herein under any other
section of the Code. For example, we express no opinion as to whether Fund 1
has, in fact, satisfied all of the requirements of Section 1296 and the regulations
thereunder. We also express no opinion as to whether Fund 1 qualifies as a RIC
under subchapter M, part I, of Chapter 1 of the Code.

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 and second representatives.

                                             Sincerely,

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




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