IRS consents to revoke a mark-to-market election on a foreign fund so the investor can switch to a QEF election

Plain-English summary

A U.S. investment partnership held stock in a foreign company that is a passive foreign investment company (PFIC). A U.S. owner of PFIC stock generally must choose a tax regime for it, and two common choices are a qualified electing fund (QEF) election under section 1295 and a mark-to-market (MTM) election under section 1296. The QEF election requires an annual PFIC information statement from the fund. When the partnership set up its reporting, its accountants were told those statements were not available, so on the accountants' advice it made the MTM election instead. Later the partnership learned the PFIC statements had in fact been available all along, meaning it could have used the QEF election it preferred. Because an MTM election stays in force until the stock stops being marketable or the IRS consents to revoke it, the partnership asked the IRS to consent to revoke the MTM election based on a "substantial change in circumstances." The IRS agreed, finding the newly discovered availability of the statements qualified, and let the revocation take effect for the year the partnership had already filed as a QEF. The practical result is that the investor may drop the mark-to-market regime and use the QEF regime going forward.

Ruling snapshot

• Question: May a PFIC shareholder revoke its section 1296 mark-to-market election, with IRS consent, on the ground that PFIC information statements needed for a QEF election turned out to be available?
• Outcome: Approved (consent to revoke granted, effective for Taxable Year 3)
• Key authorities: IRC § 1296(k); § 1297(a); § 1295; Treas. Reg. § 1.1296-1(h)(3)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202235007                                             Third Party Communication: None
 Release Date: 9/2/2022                                        Date of Communication: Not Applicable
 Index Number: 1296.00-00
                                                               Person To Contact:
 -----------------------                                       --------------------, ID No. -----------------
 -----------------------------------------                     Telephone Number:
 -------------------------------------------                   --------------------
 ------------------------------------------                    Refer Reply To:
                                                               CC:INTL:B02
                                                               PLR-124831-21
                                                               Date:
                                                               June 6, 2022




                 TY:
Legend

Shareholder = ------------------------------------------------------------------
Foreign Company = -----------------------------------------
Master Fund = --------------------------------------
Affiliate = ------------------------
Fund Administrator = --------------------
Officer = -----------------------------------------------------------------------------------
Accounting Firm = ------
State A = -------------
State B = -------------
Foreign Country = -------------
Date 1 = -----------------------
Date 2 = ------------------
Date 3 = ------------------------
Date 4 = --------------
Date 5 = --------------
Date 6 = -------------
Taxable Year 1 = ------------------------
Taxable Year 2 = ------------------------
Taxable Year 3 = ------------------------

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

This is in response to a letter received by our office dated December 8, 2021 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 Foreign Company, 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.

FACTS

Shareholder is a limited partnership formed on Date 1 under the laws of State A.
Shareholder invests in Master Fund and also holds other investments, including Foreign
Company which it acquired in Taxable Year 1. Shareholder is affiliated with Affiliate, a
State B-based investment management firm.

Between Date 2 and Date 3, Affiliate engaged Fund Administrator to provide
administrative services with respect to Affiliate's investment funds. At the same time,
Affiliate engaged Accounting Firm to provide tax consulting and compliance services,
including return preparation. Accounting Firm used information it received from Fund
Administrator to determine whether Affiliate's foreign company investments were PFICs.
Accounting Firm also evaluated if any PFIC elections were available when a foreign
company investment was a PFIC.

On Date 4, Fund Administrator provided Accounting Firm a file containing information
regarding Affiliate's funds' foreign company investments for Taxable Year 1. The file
reflected Shareholder's investment in Foreign Company but did not contain any of the
information that Accounting Firm would normally use to determine whether a foreign
company was a PFIC.

Subsequently, on Date 5, Fund Administrator provided Accounting Firm a file containing
information regarding Affiliate's funds' foreign company investments for Taxable Year 2.
The file for Taxable Year 2 identified Foreign Company as one of Shareholder's foreign
company investments. Based on this information, Accounting Firm confirmed Foreign
Company was a PFIC and evaluated if Shareholder could make either a qualified
electing fund (QEF) election under section 1295 or a MTM election under section 1296.
Accounting Firm recommended that Shareholder make a MTM election due to the
absence of a PFIC Annual Information Statement ("PFIC Statement") described in
Treas. Reg. § 1.1295-1(g)(1), which would have permitted Shareholder to make a QEF
election for Foreign Company. Shareholder made a MTM election for Foreign Company
on a Form 8621, Information Return by a Shareholder of a Passive Foreign Investment
Company or Qualified Electing Fund, included with its timely filed Form 1065, U.S.
Return of Partnership Income, for Taxable Year 2.

On Date 6, Officer learned that PFIC Statements were available for Foreign Company
for Taxable Year 2 and Taxable Year 3. If Officer and Accounting Firm had known that
these PFIC Statements were available, Shareholder would have made a QEF election.

Shareholder filed its Form 1065 for Taxable Year 3 consistent with the MTM election
having been revoked and with a QEF election for Foreign Company.

RULING REQUESTED

Shareholder requests the consent of the Commissioner to revoke its MTM election with
respect to Foreign Company at the end of Taxable Year 2 based on a finding of
substantial change in circumstances.

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.

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 a 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 section MTM
election will be 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) 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 where a 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.

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," which may include a foreign
corporation ceasing to be a PFIC. There are no other examples or guidelines regarding
what constitutes a substantial change in circumstances.

Shareholder made a MTM election for Foreign Company in Taxable Year 2 because it
was unable to obtain the Foreign Company PFIC Statement necessary to make a QEF
election for Foreign Company in such year. In Taxable Year 3, Shareholder learned
that Foreign Company PFIC Statements were available. Because the Shareholder's
Foreign Company MTM election would remain in effect until Foreign Company's stock is
no longer marketable stock or the Secretary consents to revoke the MTM election due
to a substantial change in circumstances, Shareholder requested consent to revoke its
Foreign Company MTM election. Shareholder states that the newly discovered
availability of Foreign Company PFIC Statements constitutes a substantial change in
circumstances. We agree and consent to Shareholder's request to revoke its MTM
election for Foreign Company.

Year of Revocation.

Treas. Reg. § 1.1296-1(h)(3)(ii) generally provides that, when a 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 Foreign Company MTM election be revoked effective for
Taxable Year 3. Shareholder also filed its Form 1065 for Taxable Year 3 consistent
with the MTM election having been revoked and instead a QEF election having been
made. Under Treas. Reg. § 1.1296-1(h)(3)(ii), Shareholder's Foreign Company MTM
election would cease to apply beginning with Shareholder's first taxable year after the
revocation is granted unless otherwise provided by the Commissioner. Based on the
facts described, section 1296 and Shareholder's Foreign Company MTM election will
cease to apply beginning with Taxable Year 3.

CONCLUSION

Based on the information and representations submitted, Shareholder's request for
consent to revoke its Foreign Company MTM election, effective for its Taxable Year 3,
is granted.

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/ Kristine A. Crabtree

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


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