Fund receives late mark-to-market election relief for PFIC stock

Plain-English summary

A regulated investment company acquired publicly traded stock in a foreign corporation that became a passive foreign investment company. Its outside tax advisor identified the PFIC but failed to advise the fund to make the § 1296 mark-to-market election by the return due date. The error was discovered while preparing the following year's tax provision, before the IRS raised the issue on audit. The IRS found that the fund reasonably relied on a qualified tax professional and met the standards for discretionary relief under Treas. Reg. § 301.9100-3. It granted 60 days to make the election. The letter requests relief for Year 2 but its conclusion refers to the stock election for Year 1, an apparent inconsistency in the released text.

Ruling snapshot

• Question: Could the fund make a late § 1296 mark-to-market election after its tax advisor failed to recommend the timely election?
• Outcome: Approved, with a 60-day extension
• Key authorities: IRC §§ 1296 and 1297; Treas. Reg. §§ 1.1296-1(h), 301.9100-1, and 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201451029 Third Party Communication: None
Release Date: 12/19/2014 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-119406-14
Date:
September 19, 2014

TY: -------

Taxpayer = --------------------------------------------------------------------------------------
EIN: -----------------
Trust = ---------------------------------------------------------
Company = --------------------------------------------------------
Parent = ---------------------------------------
State = --------------
Advisor = ---------------------------------------
Accounting Firm = ---------------------------
FC = -------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------

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

This is in response to a letter received by our office on January 30, 2014, and
subsequent submissions, submitted by Taxpayer, requesting extensions 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 1296.1

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

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-119406-14 2

FACTS

Taxpayer is a single series of Trust, a State trust that is registered as an open-end
management investment company under the Investment Company Act of 1940, as
amended, and is taxed as a regulated investment company (RIC) under subchapter M
of the Internal Revenue Code. Taxpayer and each series of Trust are treated as
separate corporations under section 851(g). Shares of Taxpayer are offered only to
separate accounts that fund insurance contracts issued by Company (an insurance
company), its affiliates, and third-party insurance companies. Company is a subsidiary
of Parent.

An outside consultant, Advisor, prepares the annual tax provisions and separate income
tax returns for Trust and its underlying funds, including Taxpayer. In addition,
Accounting Firm, a reputable accounting firm, reviews the provisions and returns
prepared by Advisor as part of auditing services for Parent. The provisions and returns
prepared by Advisor are also reviewed by Company’s corporate tax department.
Company also uses a service of Accounting Firm that is separate from the audit
services; the service is used to identify any passive foreign investment company
(“PFIC”) securities held in Trust’s underlying funds, including Taxpayer.

In Year 1 and Year 2, Taxpayer purchased publicly-traded shares of FC, a foreign
corporation. Taxpayer determined that FC was not a PFIC (as defined in section
1297(a)) for Year 1, but was a PFIC beginning in Year 2. As part of preparing the Year
2 returns, Accounting Firm identified FC as a PFIC in its report which was then used by
Advisor to prepare the Year 2 returns. However, Advisor failed to advise Taxpayer to
make a mark-to-market election with respect to FC. In preparing the Year 3 tax
provision, Advisor discovered the error made in Year 2 with respect to FC.

Taxpayer has submitted affidavits, under penalties of perjury, that describe the events
that led to the failure to make a mark-to-market election with respect to FC by the
election due date, including an affidavit from Advisor.

Taxpayer represents that, as of the date of this request for ruling, the PFIC status of FC
had not been raised by the IRS on audit of Taxpayer for any of the taxable years at
issue.

RULING REQUESTED

Taxpayer requests the consent of the Commissioner to grant an extension of time under
Treas. Reg. §301.9100-3 to elect section 1296 mark-to-market treatment with respect to
FC for Year 2.
PLR-119406-14 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.
PLR-119406-14 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 Taxpayer
satisfies the requirements for a reasonable extension of time to make the mark-to-
market election under section 1296 of the Code with respect to FC. 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 FC for Year 1.

The granting of an extension of time is not a determination that Taxpayer is otherwise
eligible to make the election under section 1296. Treas. Reg. § 301.9100-1(a).
PLR-119406-14 5

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

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,



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