IRS grants late mark-to-market elections for passive foreign investment company funds

Plain-English summary

A taxpayer invested through multiple funds that were passive foreign
investment companies, or PFICs. Its accounting firm failed to identify the
funds as PFICs and did not advise the taxpayer to make mark-to-market elections
under IRC § 1296. A later accounting firm discovered the issue and recommended
seeking additional time. The taxpayer requested relief before the IRS found the
failure, represented that relief would not reduce its aggregate tax liability,
and stated that it was not using hindsight. It also submitted affidavits,
including from the original accounting firm. The IRS concluded that the
requirements of Treas. Reg. §§ 301.9100-1 and 301.9100-3 were satisfied and
granted 60 days to make the elections for the affected funds and years.

Ruling snapshot

• Question: May the taxpayer receive additional time to make § 1296
  mark-to-market elections for its PFIC investments?
• 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: 202041006 [Third Party Communication:
Release Date: 10/9/2020 Date of Communication: Month DD, YYYY]
Index Number: 9100.00-00, 1296.00-00
Person To Contact:
--------------------------- -----------------, ID No. ---------------
----------------------------- Telephone Number:
-------------------------------- --------------------
--------------------------- Refer Reply To:
CC:INTL:B02
PLR-128849-16
Date:
February 21, 2020

            TY: ----------------------------------------------

Legend

Taxpayer = -----------------------------------
------------------------
Company A = ---------------------------------------------------------------------------------
-----------------
------------------------
------------------------
State B = -------------
Country C = ---------

Fund 1 = ------------------------------------------------------
Fund 2 = --------------------------------------------------
Fund 3 = -----------------------------------------------------------
Fund 4 = ------------------------------------------------------------
Fund 5 = --------------------------------------------------------------
Fund 6 = --------------------------------------------------------------
Fund 7 = --------------------------------------------------------
Fund 8 = ---------------------------------------------------------
Fund 9 = ----------------------------------------------
Fund 10 = ---------------------------------------------------------------------------------
Fund 11 = ------------------------------------------------

Date 1 = ----------
Date 2 = ------------------
Date 3 = ------------
Date 4 = ----------------
Date 5 = ------------------
Date 6 = -----------
Date 7 = ----------------
Date 8 = -------------------

Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------

Accounting Firm 1 = ----------
Accounting Firm 2 = --------------------------

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

   This is in response to correspondence submitted on behalf of Taxpayer by its

authorized representative, requesting an extension of time under §§ 301.9100-1 and
301.9100-3 of the Procedure and Administration Regulations to make a mark to marke
election under section 1296 of the Internal Revenue Code with respect to its investmen
in passive foreign investment companies (“PFICs”).

  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. This office has not verified any of the material submitted in
support of the request for a ruling. Verification of the factual information,
representations, and other data submitted may be required as part of the audit process.

FACTS

    Company A was organized as a State B corporation and is the common parent of

an affiliated group of which Taxpayer was a member. Taxpayer is a diversified
investment management company with an umbrella fund (a foreign entity) containing
various sub-funds, including Fund 1, Fund 2, Fund 3, Fund, 4, Fund 5, Fund 6, Fund 7,
Fund 8, Fund 9, Fund 10, and Fund 11 (collectively, the “Funds”). Each of the Funds
was organized under the laws of Country C and was a PFIC within the meaning of
section 1297 during the relevant taxable years.

     Taxpayer made the investment in

        •   Fund 1 and Fund 2 on Date 1, Year 1,
        •   Fund 3 and Fund 4 on Date 2, Year 2,
        •   Fund 5 and Fund 6 on Date 3, Year 3,
        •   Fund 7 on Date 4, Year 3
        •   Fund 8 on Date 5, Year 3,
       •   Fund 9 on Date 6, Year 4,
       •   Fund 10 on Date 7, Year 4, and
       •   Fund 11 on Date 8, Year 5.

    For the taxable years at issue, Company A contracted with Accounting Firm 1, to

advise it on tax matters, including the U.S. federal income tax consequences of
Taxpayer’s investment in the Funds. For the taxable years at issue, Company A also
engaged Accounting Firm 1 to provide tax compliance services, including the
preparation of the consolidated U.S. income tax returns of Company A, of which
Taxpayer was a member. Company A retained Accounting Firm 1’s services on the
basis that it employs tax professionals who are competent to render tax advice on U.S.
federal income tax matters, including the tax consequences of a U.S. person owing
stock in a foreign corporation. Further, Company A made available to Accounting Firm
1 the financial statements with respect to the Funds, as well as all other relevan
information.

     For the taxable years at issue, Accounting Firm 1 failed to identify the Funds as

PFICs and failed to advise Company A or Taxpayer of the tax consequences of making,
or failing to make, mark to market elections under section 1296 with respect to the
Funds.

   Company subsequently engaged Accounting Firm 2 to render tax advisory

services and to prepare its consolidated U.S. federal income tax returns. Upon review,
Accounting Firm 2 identified the Funds as PFICs and advised Company A to seek a
private letter ruling requesting an extension of time to make the mark to marke
elections for the Funds.

   Taxpayer has submitted affidavits, including affidavits from Accounting Firm 1,

signed under penalties of perjury in support of this ruling request. In addition, Taxpayer
has made the following additional representations with respect to the mark to marke
election:

  1.         The request for relief was filed by Taxpayer before the failure to make
             the regulatory election was discovered by the IRS.

  2.         Granting the relief will not result in Taxpayer having a lower tax liability
             in the aggregate for all years to which the regulatory election applies
             than that the Funds would have had if the election had been made
             timely (taking into account the time value of money).

  3.         Taxpayer is not seeking to alter a return position for which an
             accuracy-related penalty has been or could have been imposed under
             section 6662 of the Code at the time the Funds requested relief and the
             new position requires or permits a regulatory election for which relief is
             requested.

   4.        Taxpayer did not choose to not file the election. Rather, Taxpayer was
             unaware of the status of the Funds as PFICs.

   5.        Taxpayer is not using hindsight in requesting relief. No specific facts
             have changed since the due date for making the elections that now
             make the elections more advantages to Taxpayer.

   6.        As of the date of Taxpayer’s request for ruling, the PFIC status of the
             Funds has not been raised by the IRS on audit for the taxable year a
             issue.

LAW

   Section 1296(a) provides that, in the case of marketable stock in a passive

foreign investment company that is owned by a U.S. person at the close of any taxable
year, the person may elect to include in gross income the excess of the fair marke
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, excep
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

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,
               the taxpayer was unaware of the necessity for the election; or
   (iv)        reasonably relied on a qualified tax professional, and the tax professional
               failed to make, or advise the taxpayer to make, the election.

CONCLUSION

    Based on the information and representations submitted, we conclude tha

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 each Fund.
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

           •   Fund 1 and Fund 2 for its taxable year ending on December 31, Year 1,
           •   Fund 3 and Fund 4 for its taxable year ending on December 31, Year 2,
           •   Fund 5, Fund 6, Fund 7, and Fund 8 for its taxable year ending on
               December 31, Year 3,
           •   Fund 9 and Fund 10 for its taxable year ending on December 31, Year 4,
               and
           •   Fund 11 for its taxable year ending on December 31, Year 5.

   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,

                                       /s/ Kristine A. Crabtree

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

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