Investment partnership receives 60 days to make late PFIC mark-to-market elections

Plain-English summary

An investment portfolio taxed as a partnership owned stock in six passive foreign investment companies and decided to make section 1296 mark-to-market elections for them. Its accounting firm prepared an extension request but failed to file it because of an administrative oversight. The partnership filed its return and Forms 8621 after the original deadline but before the deadline that would have applied if the extension request had been filed. The partnership represented that it reasonably relied on qualified professionals, did not use hindsight, would receive no aggregate tax advantage, and still had open assessment periods. The IRS granted 60 days to make the elections, while expressly declining to decide whether the partnership otherwise qualified for section 1296 treatment.

Ruling snapshot

• Question: May the partnership make late section 1296 mark-to-market elections for stock in six PFICs after its accounting firm failed to file a prepared return-extension request?
• Outcome: Approved, with the elections due within 60 days
• Key authorities: IRC §§ 1296, 1297, 6501, and 6662; 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: 201806004                                             Third Party Communication: None
Release Date: 2/9/2018                                        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-104292-17
                                                              Date:
                                                              November 1, 2017


                  TY: -------

Legend

Shareholder = ------------------------------------------------------------
-------------------------------------
Fund = ------------------------------------------
Accounting Firm = ----------------
Date 1 = -----------------------
Date 2 = --------------------
Date 3 = -------------------
Date 4 = ---------------------------
State = --------------
Company = ----------------------------------------
Year = -------
FC 1 = ----------------------------------------
FC 2 = -----------------------------------------
FC 3 = ---------------------------------------------
FC 4 = ------------------
FC 5 = ------------------------------------------
FC 6 = ------------------------
Country A = -----------------
Country B = ------------
Country C = ------------------
Country D = ---------
Country E = ---------
Country F = ----------------

Dear -----------------:
PLR-104292-17                                        2

This is in response to a letter received by our office on February 14, 2017, submitted by
Shareholder, requesting extensions of time under §§ 301.9100-1 and 301.9100-3 of the
Procedure and Administration Regulations to make mark-to-market elections under
section 1296 with respect to certain passive foreign investment companies (PFICs).1

The rulings contained in this letter are based upon information and representations
submitted by Shareholder 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

Shareholder is one of a series of investment portfolios comprising Fund. Shareholder
was established on Date 1 pursuant to State law. Company is the managing member of
Fund. Shareholder is taxed as a partnership for federal income tax purposes.

During Year, Shareholder held stock in FC 1, FC 2, FC 3, FC 4, FC 5, and FC 6, which
are organized under the laws of Country A, Country B, Country C, Country D, Country
E, and Country F, respectively. Each of these corporations is a PFIC within the
meaning of section 1297.

During Year, Shareholder decided to make mark-to-market elections under section
1296 with respect to its FC 1, FC 2, FC 3, FC 4, FC 5, and FC 6 stock. Shareholder
relied on qualified tax professionals at Accounting Firm to prepare and file its tax return
for Year, including to make the mark-to-market elections. On or before Date 2, which
was the due date for Shareholder’s tax return for Year, Accounting Firm was to prepare
and submit Form 7004, Application for Automatic Extension of Time to File Certain
Business Income Tax, Information, and Other Returns, on behalf of Shareholder.
Accounting Firm prepared Form 7004 prior to Date 2, but inadvertently failed to timely
file Form 7004 due to an administrative oversight.

Shareholder’s Form 1065, U.S. Return of Partnership Income, for Year was filed on
Date 3, which was prior to the date the return would have been due if the Form 7004
had been timely filed. Along with its Form 1065, Shareholder attempted to make the
mark-to-market elections under section 1296 with respect to its FC 1, FC 2, FC 3, FC 4,
FC 5, and FC 6 stock on Form 8621, Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund. However, as a result of Shareholder’s
failure to timely file Form 7004, the mark-to-market elections were not timely.

Shareholder received a notice from the IRS dated Date 4, asserting a late-filing penalty
because of Shareholder’s failure to timely file its Form 1065.

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-104292-17                                3

Shareholder has submitted affidavits, under penalties of perjury, that describe the
events that led to the failure to timely make the mark-to-market elections by the election
due date, including affidavits from advisors at Accounting Firm.

Shareholder represents that, as of the date of the request for ruling, the PFIC status of
FC 1, FC 2, FC 3, FC 4, FC 5, and FC 6 have not been raised by the IRS on audit of
Shareholder for any of the taxable years at issue.

Shareholder makes the following additional representations for each election:

    1. Shareholder reasonably relied on a qualified tax professional who failed to timely
      file Shareholder’s Form 7004.
    2. Shareholder is not attempting to alter a return position taken for which a penalty
      has been or could be imposed under section 6662 at the time Shareholder
      requests relief.
    3. This is not a situation in which Shareholder was informed of all material respects
      of the required election and related tax consequences but chose not to file the
      election.
    4. No facts have changed since the due date of the election that would make the
      election advantageous.
    5. Granting relief will not result in Shareholder having a lower tax liability in the
      aggregate for all years to which the election applies than Shareholder would
      have had if the election had been timely made.
    6. The statute of limitations on assessment under section 6501 has not expired for
      Year or any of the affected taxpayers for any periods affected by the election.

RULING REQUESTED

Shareholder 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 1, FC 2, FC 3, FC 4, FC 5, and FC 6.

LAW

Section 1296(a) provides that, in the case of marketable stock in a PFIC 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.
PLR-104292-17                                 4

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.

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.
PLR-104292-17                                  5

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 and as described in the Facts
section above, we conclude that Shareholder satisfies the requirements for a
reasonable extension of time to make mark-to-market elections under section 1296 of
the Code with respect to FC 1, FC 2, FC 3, FC 4, FC 5, and FC 6. Accordingly,
Shareholder is granted an extension of time of 60 days from the date of this letter to
make the elections under section 1296 with respect to the stock of these PFICs for
Year.

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

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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.


                                        Sincerely,



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