Investment company allowed to revoke PFIC mark-to-market election

Plain-English summary

A regulated investment company made a mark-to-market election for stock in a passive foreign investment company because it did not know the foreign company would provide annual PFIC information statements. After learning that the statements were available, it wanted to revoke the mark-to-market election and instead make a qualified electing fund election. The IRS treated the later availability of the statements as a substantial change in circumstances outside the shareholder's control and allowed revocation effective for the requested year. The ruling also reset the PFIC holding period under the regulations, preserved prior basis adjustments, and allowed pedigreed-QEF status if a valid QEF election was made.

Ruling snapshot

• Question: Could the regulated investment company revoke its PFIC mark-to-market election after learning that QEF information statements were available?
• Outcome: approved
• Key authorities: IRC §§ 1291, 1295, 1296, 1297; Treas. Reg. §§ 1.1291-1, 1.1295-1, 1.1296-1

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202423007                                              Third Party Communication: None
 Release Date: 6/7/2024                                         Date of Communication: Not Applicable
 Index Number: 1296.00-00
                                                                Person To Contact:
 ----------------------                                         ------------------, ID No. -----------------
 -----------------------------------------------                Telephone Number:
 ---------------------------------------                        --------------------
 -------------------------------                                Refer Reply To:
                                                                CC:INTL:B02
                                                                PLR-122341-23
                                                                Date:
                                                                March 12, 2024




                            TY: -------

Legend

 Shareholder            =    -----------------------------------------------
 FC                     =    ----------------------------------------------
 Date 1                 =    ------------
 Date 2                 =    ----------------------
 Date 3                 =    -----------------------
 Date 4                 =    -----------------------
 Date 5                 =    -----------------
 Year 1                 =    ------------------------------------------------------------
 Year 2                 =    ------------------------------------------------------------
 Taxable Year 1         =    ------------------------------------------
 Taxable Year 2         =    ------------------------------------------
 Taxable Year 3         =    ------------------------------------------


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

This is in response to a letter received by our office dated October 31, 2023 submitted
by Shareholder requesting consent to revoke a mark-to-market (MTM) election under
section 1296 pursuant to Treasury Regulation § 1.1296-1(h)(3) with respect to its
investment in FC, a passive foreign investment company within the meaning of section
1297(a) (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. While this office has not verified any of the material submitted
in support of the request for a ruling, it is subject to verification on examination.
PLR-122341-23                                 2



FACTS

Shareholder is treated as a regulated investment company (RIC) under subchapter M of
the Internal Revenue Code. Shareholder’s taxable year ends on Date 1. Shareholder
routinely invests in companies that are PFICs within the meaning of section 1297(a).

As a general practice, when a PFIC provides a PFIC annual information statement
(PFIC Statement) described in Treas. Reg. § 1.1295-1(g)(1), Shareholder elects to treat
that PFIC as a qualified electing fund (QEF) within the meaning of section 1295 in the
year in which it acquires the stock of the PFIC. Not all PFICs in which Shareholder
acquires stock provide PFIC Statements to their shareholders. For those that do not
provide a PFIC Statement to their shareholders, Shareholder generally elects to make
an MTM election under section 1296 with respect to such stock.

Shareholder acquired an interest in FC on Date 2, which was during Taxable Year 1.
FC is a foreign corporation that was a PFIC in its Year 1 and Year 2 taxable years. FC
did not inform Shareholder that PFIC Statements were available until after Taxable Year
1 had ended. Because Shareholder was not aware that PFIC Statements were
available, for Taxable Year 1, Shareholder made an MTM election with respect to its
stock in FC.

At all relevant times, Shareholder, which was treated as a RIC, offered for sale and had
outstanding stock of which it was the issuer and which was redeemable at its net asset
value. Accordingly, in the year of acquisition, stock in the FC constituted “marketable
stock” under section 1296(e)(2) and Treas. Reg. § 1.1296-2(f). With respect to FC, in
Taxable Year 1, Shareholder included amounts in gross income under section
1296(a)(1) and has adjusted its basis in FC pursuant to section 1296(b) accordingly.

After Date 3, which was the due date of Shareholder’s Taxable Year 1 return,
Shareholder learned that PFIC Statements were available for FC. Shareholder would
like to make a QEF election with respect to its stock in FC but cannot do so while its
MTM election is in effect. An MTM election can be revoked only with the consent of the
Commissioner “upon a finding of a substantial change in circumstances” within the
meaning of Treas. Reg. § 1.1296-1(h)(3).

Shareholder represents that, if the ruling request is granted, it intends to file a QEF
election for FC with its tax return for Taxable Year 2.
PLR-122341-23                                 3



RULING REQUESTED

Shareholder requests the consent of the Commissioner to revoke its MTM Election with
respect to FC for Shareholder’s Taxable Year 2 based on a finding of a substantial
change in circumstances, with the following consequences:

(1) Section 1296 ceases to apply to Shareholder with respect to FC beginning with
    Shareholder’s Taxable Year 2;

(2) Pursuant to Treasury Regulation § 1.1296-1(g), solely for purposes of sections 1291
    through 1298, Shareholder’s holding period in FC is treated as beginning on Date 5;

(3) Provided Shareholder makes a valid QEF election for FC for Taxable Year 2, FC is a
    “pedigreed QEF” within the meaning of Treasury Regulation § 1.1291-1(b)(2)(ii) with
    respect to Shareholder; and

(4) Shareholder’s stock basis in FC includes the basis adjustment allowed pursuant to
    section 1296(b) and the regulations thereunder.

LAW

Section 1297(a) provides that the term “PFIC” means any foreign corporation if (i) 75
percent or more of the gross income of the corporation for the taxable year is passive
income; or (ii) the average percentage of assets (as determined in accordance with
section 1297(e)) held by the corporation during the taxable year which produce passive
income or which are held for the production of passive income is at least 50 percent.

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 or, if the adjusted
basis exceeds the fair market value of the stock, deduct the lesser of the excess or the
unreversed inclusions.

Under section 1296(e)(2), in the case of any RIC issuing stock that is redeemable at its
net asset value, all stock in a PFIC which it owns, directly or indirectly, shall be treated
as marketable stock for purposes of section 1296.

Under section 1296(b)(1), the adjusted basis of stock in a PFIC is increased by the
amount included in the gross income of the United States person under section
PLR-122341-23                                 4


1296(a)(1) with respect to the stock and is decreased by the amount allowed as a
deduction to the United States person under section 1296(a)(2) with respect to the
stock.

Section 1296(k) provides that the MTM election will apply to the taxable year for which it
is made and all subsequent taxable years unless the stock ceases to be marketable
stock or the Secretary consents to the revocation of the election, and Treas. Reg. §
1.1296-1(h)(2)(i) provides that an MTM election will apply to the taxable year for which
the election is made and remain in effect for each succeeding taxable year unless the
election is revoked or terminated pursuant to Treas. Reg. § 1.1296-1(h)(3).

Treas. Reg. § 1.1296-1(h)(3)(i) provides that a United States person’s MTM election is
terminated if (i) the PFIC stock ceases to be marketable; (ii) the United States person
elects, or is required, to mark to market the PFIC stock under another provision of
chapter 1 of the Code; or (iii) if the Commissioner, in the Commissioner’s discretion,
consents to the United States person’s request to revoke its MTM election upon a
finding of a substantial change in circumstances, which may include a foreign
corporation ceasing to be a PFIC.

Treas. Reg. § 1.1296-1(h)(3)(ii) provides that, unless otherwise provided by the
Commissioner, where an MTM election is revoked with the consent of the
Commissioner, section 1296 will cease to apply beginning with the first taxable year of
the United States person after the revocation is granted unless otherwise provided by
the Commissioner.

Treas. Reg. § 1.1296-1(f) provides that solely for purposes of sections 1291 through
1298, if section 1296 applied to stock with respect to the taxpayer for any prior taxable
year, the taxpayer’s holding period in the stock is treated as beginning on the first day of
the first taxable year beginning after the last taxable year for which section 1296
applied.

Under section 1295(b)(1), a taxpayer may make a QEF election with respect to any
PFIC for any taxable year of the taxpayer, and the election applies to all subsequent
taxable years of the taxpayer with respect to the PFIC unless revoked by the taxpayer
with the consent of the Secretary.

Treas. Reg. § 1.1295-1(g)(1) provides that, for each year of a PFIC ending during a
taxable year of a shareholder to which the shareholder has a QEF election in effect, the
PFIC must provide the shareholder with a PFIC Statement containing the information
required by that section.
PLR-122341-23                               5


Treas. Reg. § 1.1295-1(i)(2)(i) provides that the Commissioner, in the Commissioner’s
discretion, may consent to a shareholder’s request to revoke a QEF election upon a
finding of a “substantial change in circumstances.”

Under Treas. Reg. § 1.1295-1(i)(2)(ii), a shareholder must request consent to revoke a
QEF election no later than 12 calendar months after the discovery of the substantial
change in circumstances that forms the basis for the shareholder’s request to revoke
the QEF election.

Treas. Reg. § 1.1291-1(b)(2)(ii) provides that a PFIC is a pedigreed QEF with respect to
a shareholder if the PFIC has been a QEF with respect to the shareholder for all taxable
years during which the corporation was a PFIC that are included wholly or partly in the
shareholder’s holding period of the PFIC stock.

Under section 851(a), the term RIC means any domestic corporation which (i) at all
times during the taxable year is registered under the Investment Company Act of 1940,
as amended, as a management company or unit investment trust, or has in effect an
election under such Act to be treated as a business development company, or (ii) which
is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15
U.S.C. 80a-3(c)) from the definition of “investment company” and is not included in the
definition of “common trust fund” by section 584(a).

ANALYSIS

Revocation of MTM Election.

Section 1296(k) provides that a shareholder’s MTM election for a PFIC remains in effect
until the PFIC stock is no longer marketable stock or the Secretary consents to the
revocation of the election. Treas. Reg. § 1.1296-1(h)(3)(i) allows the Commissioner, in
the Commissioner’s discretion, to consent to a shareholder’s request to revoke an
election upon a “substantial change in circumstances.” As an example, the regulation
provides that a foreign corporation ceasing to be a PFIC may be such a substantial
change in circumstances. However, there are no additional examples regarding what
constitutes a substantial change in circumstances or guidelines for requests to revoke
an MTM election.

In order for Shareholder to make a QEF election for FC, FC would have had to issue
PFIC Statements, as required under Treas. Reg. § 1.1295-1(g). However, FC did not
inform Shareholder that it would provide PFIC Statements prior to the end of
Shareholder’s Taxable Year 1. Shareholder did not discover that FC would provide
PLR-122341-23                                6


PFIC Statements until after Shareholder filed its Taxable Year 1 tax return; therefore,
Shareholder could not make a QEF election for FC in Taxable Year 1.

Subsequently, during Taxable Year 2 and after it had filed its Taxable Year 1 tax return,
Shareholder discovered that FC was preparing and issuing PFIC Statements to
shareholders, enabling shareholders who are U.S. persons (who do not have MTM
elections in place) to make QEF elections. The discovery of the decision by FC to issue
PFIC Statements was a change in the circumstances of Shareholder’s ownership in FC
that was outside the control of Shareholder. Therefore, based on the facts described in
this letter, FC’s beginning to issue PFIC Statements constitutes a substantial change in
circumstances for purposes of Treas. Reg. § 1.1296-1(h)(3)(i), and the Commissioner
hereby consents to revoke Shareholder’s MTM election for FC.

Year of Revocation.

Treas. Reg. § 1.1296-1(h)(3)(ii) provides that, when an MTM election is revoked by
request, section 1296 ceases to apply beginning with the first taxable year of the United
States person after the revocation is granted unless otherwise provided by the
Commissioner.

Shareholder requested that its MTM election for FC be revoked effective for Taxable
Year 2. Under Treas. Reg. § 1.1296-1(h)(3)(ii), Shareholder’s MTM election would
cease to apply beginning with Shareholder’s first taxable year after the revocation is
granted unless otherwise provided by the Commissioner.

Shareholder’s Taxable Year 2 had already ended prior to the date of its request (and
prior to the date of this letter), but the taxable year was still open at the date of the
request and Shareholder has not yet filed its Taxable Year 2 return, which is not due
until Date 4. Under the general rule of Treas. Reg. § 1.1296-1(h)(3)(ii), the revocation
of the MTM elections for FC would be effective for Shareholder’s Taxable Year 3.
However, based on the facts described, and because Shareholder has not yet filed its
Taxable Year 2 tax return, the revocation of Shareholder’s MTM elections for FC is
effective for Taxable Year 2.

Holding Period.

Pursuant to Treas, Reg. § 1.1296-1(f), for purposes of sections 1291 through 1298, if
section 1296 applied to stock with respect to a shareholder for any prior taxable year,
the shareholder’s holding period in the stock is treated as beginning on the first day of
the first taxable year beginning after the last taxable year for which section 1296
applied. In this case, because the MTM election for FC is revoked as of the end of
PLR-122341-23                                7


Shareholder’s Taxable Year 1, the Taxable Year 1 is the last year for which section
1296 applied. As a result, Shareholder’s holding period, for purposes of sections 1291
through 1298, with respect to FC began on Date 5, the first day of Shareholder’s
Taxable Year 2.

Pedigreed QEF Status.

Treas. Reg. § 1.1291-1(b)(2)(ii) provides that a PFIC is a pedigreed QEF with respect to
a shareholder if the PFIC has been a QEF with respect to the shareholder for all taxable
years during which it was a PFIC that are included, wholly or partly, within the
shareholder’s holding period for the PFIC stock. As discussed above, through the
application of Treas. Reg. § 1.1296-1(f), for purposes of sections 1291 through 1298,
Shareholder’s holding period with respect to the stock of FC began on Date 5, the first
day of Shareholder’s Taxable Year 2.

Shareholder has represented that if its ruling request is granted, it will make a QEF
election for FC with its Taxable Year 2 return. Therefore, provided that Shareholder
properly makes a QEF election for FC with its Taxable Year 2 return, FC would be a
pedigreed QEF with respect to Shareholder.

Basis.

Section 1296(b) requires a shareholder who has made an MTM election to adjust its
basis in its PFIC stock to increase it by the amount included in gross income under
section 1296(a)(1) and decrease it by the amount deducted under section 1296(a)(2).
There is no statutory basis or policy reason that these adjustments would cease to
apply following the revocation of an MTM election, so these adjustments are not
disregarded after a revocation of an MTM election.

CONCLUSIONS

Based on the information and representations submitted, Shareholder’s request for
consent to revoke its MTM election, effective for its Taxable Year 2, is granted.

In addition, as a result of the revocation of Shareholder’s MTM election, we conclude
that: (i) the revocation is effective as of the end of Shareholder’s Taxable Year 1 and
section 1296 ceases to apply to Shareholder beginning with Shareholder’s Taxable
Year 2; (ii) pursuant to Treas. Reg. § 1.1296-1(f), solely for purposes of sections 1291
through 1298, Shareholder’s holding period FC is treated as beginning on Date 5; (iii)
FC is a pedigreed QEF, within the meaning of Treas. Reg. § 1.1291-1(b)(2)(ii) with
respect to Shareholder, provided that Shareholder properly makes a QEF election for
PLR-122341-23                                  8


FC for its Taxable Year 1; and (iv) Shareholder’s basis in FC includes the basis
adjustments made pursuant to section 1296(b).

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 requesting 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.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

                                                   Sincerely,

                                                   /s/ Melinda E. Harvey

                                                   Melinda E. Harvey
                                                   Branch Chief, Branch 2
                                                   Associate Chief Counsel (International)




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