60-day extension for a fund to make a late mark-to-market election on PFIC stock

Plain-English summary

U.S. investors in a passive foreign investment company (PFIC) can elect, under
Section 1296, to "mark to market" their shares, meaning they report the annual
change in value instead of facing the harsher default PFIC tax rules. The election
has to be made on a timely return. Here, the taxpayer is a regulated investment
company (a mutual fund) that intended to make the mark-to-market election for one
of its foreign holdings. A late-arriving updated list reclassified that holding as
a PFIC, and although the fund told its preparers to add the election, the required
Form 8621 was left off the timely return by oversight. The mistake surfaced during
a later audit. The fund asked the IRS for extra time under the Section 301.9100-3
relief rules, backed by affidavits showing it reasonably relied on its tax
professionals. The IRS granted a 60-day extension to make the Section 1296
election for that stock. As usual, the IRS cautioned that more time to elect is
not a ruling that the fund actually qualifies to make the election.

Ruling snapshot

• Question: Should the IRS grant more time to make a late Section 1296 mark-to-market election on PFIC stock the preparer omitted?
• Outcome: Approved (60-day extension granted under Treas. Reg. § 301.9100-3)
• Key authorities: IRC § 1296; Treas. Reg. §§ 1.1296-1(h), 301.9100-1 through 301.9100-3

Full text (IRS public release)

Internal Revenue Service                          Department of the Treasury
                                                  Washington, DC 20224

Number: 202426014                                 Third Party Communication: None
Release Date: 6/28/2024                           Date of Communication: Not Applicable
Index Number: 9100.22-00, 1296.00-00
                                                  Person To Contact:
[Taxpayer name and address redacted]                --------------, ID No. --------
                                                  Telephone Number:
                                                    --------------
                                                  Refer Reply To:
                                                    CC:INTL:B02
                                                  PLR-123649-23
                                                  Date:
                                                  April 02, 2024


TY:

Legend

Taxpayer                = --------------
Trust                   = --------------
FC                      = --------------
Advisor                 = --------------
Financial Services Firm = --------------
Senior Manager          = --------------
Date A                  = --------------
Date B                  = --------------
Date C                  = --------------
Month D                 = --------------
Month E                 = --------------
Month F                 = --------------
Month G                 = --------------
Year H                  = --------------
Year I                  = --------------
Year J                  = --------------
State                   = --------------
Accounting Firm 1       = --------------
Accounting Firm 2       = --------------
Accounting Firm 3       = --------------

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

        This is in response to a letter received by our office on December 6, 2023,
submitted on behalf of Taxpayer by its authorized representative, requesting an
extension of time under Treas. Reg. §§ 301.9100-1 and 301.9100-3 of the Procedure
and Administration Regulations to make a mark to market election under section 1296
of the Internal Revenue Code ("Code") with respect to its investment in a passive
foreign investment company ("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. 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

       Taxpayer is one of a series of investment portfolios comprising Trust. Taxpayer
was established on Date A pursuant to State law. Taxpayer is treated as a corporation
for federal income tax purposes. Taxpayer is registered as a diversified, open-end
management investment company under the Investment Company Act of 1940, as
amended, and has elected to be taxed as a regulated investment company ("RIC")
under part I of subchapter M of the Code. Taxpayer has direct investments in PFICs,
including FC.

       For many years Advisor has engaged Financial Services Firm for tax compliance
services for Taxpayer. On Date B, Financial Services Firm engaged Accounting Firm 1
to assist with the tax preparation work formerly performed by Financial Services Firm,
including the preparation of Taxpayer's Form 1120-RIC for the taxable year ended on
Date C, and all relevant forms, statements, and elections.

       As part of Taxpayer's Year H Form 1120-RIC, Taxpayer intended to make
elections under section 1296 with respect to its PFICs. In Month D Year I, Accounting
Firm 1 was provided a list from Accounting Firm 2 of Taxpayer's PFICs as of the
beginning of the Year H taxable year ("Initial PFIC List"). Based on Initial PFIC List, FC
was not a PFIC with respect to Taxpayer. As such, no election was initially
contemplated under section 1296 with respect to FC stock Taxpayer owned. In Month
F Year I, Senior Manager at Accounting Firm 1 reviewed a complete initial draft of
Taxpayer's Year H return.

        In Month G Year I, Accounting Firm 1 received an updated list of Taxpayer's
PFICs from Accounting Firm 2 ("Final PFIC List"). On Final PFIC List, FC was now
identified as a PFIC. Taxpayer communicated its intention to make an election under
section 1296 with respect to FC to Financial Services Firm and Accounting Firm 1.
Based on this new information, Senior Manager directed the tax preparation team at
Accounting Firm 1 to update Taxpayer's Year H tax return draft accordingly. However,
due to an inadvertent oversight, Form 8621 with respect to FC was not prepared and
not included with Taxpayer's timely filed Year H Form 1120-RIC.

          In Month E Year J, as part of Taxpayer's Year I audit, Accounting Firm 3
reviewed Taxpayer's return and identified that Form 8621 with respect to FC had not
been included as part of Taxpayer's Year H Form 1120-RIC. Upon a review of its
records, Accounting Firm 1 identified this inadvertent oversight and advised Taxpayer of
the ability to request an extension of time to make the mark to market election for FC.

       Taxpayer has submitted affidavits from Taxpayer, Advisor, Financial Services
Firm, and Accounting Firm 1, signed under penalties of perjury in support of its ruling
request. Taxpayer has made the following additional representations with respect to the
mark to market election:

      1.        To the best of Taxpayer's knowledge, Taxpayer's failure to timely file
                the election mentioned above had not been discovered by the Internal
                Revenue Service (the "IRS") at the time of the request.

      2.        Taxpayer reasonably relied on qualified tax professionals who failed to
                prepare the election under section 1296.

      3.        Taxpayer 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
                Taxpayer requests relief.

      4.        This is not a situation in which Taxpayer was informed of all material
                respects of the required election and related tax consequences but
                chose not to file the election.

      5.        Taxpayer is not using hindsight in requesting relief. No facts had
                changed since the due date of the election that would make the
                election advantageous at the time of the request.

      6.        Granting relief will not result in Taxpayer having a lower tax liability in
                the aggregate for all years to which the election applies than Taxpayer
                would have had if the election had been timely made.

      7.        The statute of limitations on assessment under section 6501 has not
                expired for Taxpayer's taxable year ended Date C.

LAW

        Section 1296(a) provides that, in the case of marketable stock in a PFIC that is
owned by a United States person at the close of any taxable year, the 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
United States person'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
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 its stock in FC.
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 its stock in FC for
Taxpayer's taxable year ended on Date C.

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

       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 Taxpayer's representative.

                                        Sincerely,

                                        /s/ Kristine A. Crabtree

                                        Kristine A. Crabtree
                                        Senior Technical Reviewer, Branch 2
                                        Office of the Associate Chief Counsel
                                        (International)


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