New Exception to PFIC Reporting for Mark-to-Market Taxpayers

Background

PFIC is any foreign corporation if: (1) at least 75% of its gross income for its tax year is passive, or (2) at least 50% of the assets it held during the year produce passive income or are held for the production of passive income. (Code Sec. 1297(a))

Code Sec. 1291 through Code Sec. 1298 set out three tax regimes for shareholders that own stock of a PFIC:

1. Excess distribution rules under Code Sec. 1291;
2. Qualified electing fund (QEF) rules under Code Sec. 1293; and
3. MTM rules under Code Sec. 1296, which apply when an election under Code Sec. 1296(k) is in effect.

Subject to the coordination rules provided in Code Sec. 1296(j), Code Sec. 1291 does not apply if a MTM election under Code Sec. 1296(k) is in effect for the taxpayer’s tax year. Code Sec. 1291(d)(1) further provides that, subject to coordination rules similar to the rules of Code Sec. 1296(j), Code Sec. 1291 also does not apply in the case of PFIC stock that is MTM under any other provision of Chapter 1 of the Code (a “non-section 1296 MTM regime”), including Code Sec. 475 (“Mark to market accounting method for dealers in securities”).

Subject to both of these coordination rules, which are contained in Reg. § 1.1291-1(c)(4), U.S. persons that hold PFIC stock that has been marked to market under a non-section 1296 MTM regime are not subject to tax under any of the PFIC regimes. (Reg. § 1.1295-1(i)(3), Reg. § 1.1296-1(h)(3)).

So if a U.S. person makes a valid election to mark-to-market under Code Sec. 475 with respect to PFIC stock, that person will not be subject to any of the PFIC rules with respect to that stock. He or she will be subject to tax under the PFIC regimes with respect to any PFIC stock that is not MTM under a non-section 1296 MTM regime.

However, the current regulations under Reg. § 1.1298-1T do not provide an exception from the information reporting requirements for shareholders of PFIC stock that is mark to market under a non-section 1296 MTM regime. Thus, a U.S. person that owns PFIC stock that is MTM under a non-section 1296 MTM regime, was still subject to the rules under Reg. § 1.1298-1T which are applicable to direct and indirect shareholders that own PFIC stock.

Although regulations excepting MTM taxpayers from the PFIC reporting rules have not been finalized yet, dealers and other taxpayers who have made non-1296 MTM elections may rely on the rules in Notice 2014-51 for tax years ending on or after December 31, 2013.