Investment portfolio received 60 days for five PFIC elections

Plain-English summary

An investment portfolio within a larger fund was taxed as a partnership and held stock in five passive foreign investment companies. It had valid mark-to-market elections and renewed them after one technical termination, but a later transfer of more than half its capital and profits caused a second technical termination under former section 708(b)(1)(B). Because the transfer was not properly recorded, neither the portfolio nor its accounting firm knew that new elections were required for the resulting short tax year. The portfolio sought relief before the IRS raised the omission and represented that it was not changing a penalized position, using hindsight, or lowering aggregate tax liability. The IRS granted 60 days to make all five section 1296 elections, without deciding whether the portfolio otherwise qualified.

Ruling snapshot

• Question: Could the investment portfolio make late section 1296 elections for five PFIC holdings after a second technical partnership termination?
• Outcome: approved, with 60 days to make the elections
• Key authorities: IRC §§ 708(b)(1)(B), 1296, 1297, 6501, 6662; Treas. Reg. §§ 1.1296-1, 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201930005                                              Third Party Communication: None
Release Date: 7/26/2019                                        Date of Communication: Not Applicable
Index Number: 9100.00-00, 1296.00-00
                                                               Person To Contact:
------------------------------------------------------------   --------------------, ID No. -----------------
----------------                                               Telephone Number:
--------------------------------------------                   --------------------
---------------------------------                              Refer Reply To:
--------------------------------------------                   CC:INTL:B02
------------------------------                                 PLR-123148-18
                                                               PLR-108459-19
                                                               PLR-108460-19
                                                               PLR-108461-19
                                                               PLR-108462-19
                                                               Date:
                                                               April 26, 2019

                  TY: ------

Legend

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

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

This is in response to a letter dated July 25, 2018, and subsequently furnished
additional information, submitted by Shareholder’s authorized representative, 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 of the
Internal Revenue Code with respect to Shareholder’s investments in FC1 through FC 5
(collectively, FCs).

The ruling contained in this letter is based upon information and representations
submitted by the Shareholder and accompanied by penalty of perjury statements
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 pursuant to State law. Company is the managing member of Fund.
Shareholder is taxed as a partnership for Federal income tax purposes. The taxable
year of Shareholder ends on Day. Since its inception, Shareholder has engaged
Accounting Firm to serve as its tax advisor. Shareholder owns stock in FCs, which
qualified as passive foreign investment companies (PFICs), as defined in section 1297,
with respect to Shareholder for all relevant years.

Shareholder had valid mark-to-market elections under section 1296 in place with
respect to its stock in FCs for the Prior Year taxable year. During Year, Shareholder
timely filed mark-to-market elections with respect to its stock in FCs after a technical
termination of Shareholder occurred on Date 1. Shareholder, however, failed to timely
file mark-to-market elections with respect to its stock in FCs after a second technical
termination of Shareholder occurred on Date 3.

On Date 3, the majority investor in Shareholder transferred its interest in the capital and
profits of the partnership. The transfer of more than 50 percent of the total interest in
the capital and profits of Shareholder resulted in a technical termination of Shareholder
under section 708(b)(1)(B). Because the transfer on Date 3 was not properly recorded,
neither Accounting Firm nor Shareholder knew the majority investor transfer had
occurred on Date 3 until after the due date (including extensions) to file the return of
Shareholder for the short taxable year ending on Date 3 and failed to timely file mark-to-
market elections with respect to the stock owned by Shareholder in: FC 1, organized in
Country A; FC 2, organized in Country B; FC 3, organized in Country C; FC 4,
organized in Country D; and FC 5, organized in Country E.

Shareholder 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 makes the following additional representations:

    1. The Internal Revenue Service (IRS) has not raised the failure of Shareholder to
      timely file mark-to-market elections with respect to its stock in FCs.
    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
      Shareholder’s Year tax year or the tax years of any of the taxpayers 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 its stock in FCs for the taxable year beginning on Date 2 and ending on Date
3.

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.

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.

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 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 its stock in FCs. 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 its stock in FCs for the taxable
year beginning on Date 2 and ending on Date 3.

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,



                                       Kristine A. Crabtree
                                       Senior Technical Reviewer, Branch 2
                                       (International)