n-14-51.pdf

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Section 1298(f) Reporting Requirements for U.S. Persons that Hold Stock of a Passive
Foreign Investment Company that is Marked to Market Under Section 475 or Another
Chapter 1 Code Provision Other Than Section 1296

Notice 2014-51

# SECTION 1. PURPOSE

This notice announces that the Department of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS) will amend the regulations under section
1298(f) of the Internal Revenue Code (Code) to provide guidance concerning United
States persons (U.S. persons) that hold stock of a passive foreign investment company
within the meaning of section 1297(a) (PFIC) that is marked to market under section
475 or another chapter 1 Code provision other than section 1296.

SECTION 2. BACKGROUND

.01 Sections 1291 Through 1298

Sections 1291 through 1298 set forth three tax regimes for shareholders that own
stock of a PFIC: (i) the excess distribution rules under section 1291; (ii) the qualified
electing fund (QEF) rules under section 1293; and (iii) the mark to market rules under
section 1296, which apply when an election under section 1296(k) is in effect.

Section 1298(f) provides that, except as otherwise provided by the Secretary, a U.S.
person that is a shareholder of a PFIC must file an annual report containing the
information required by the Secretary. Section 1.1298-1T sets forth the annual
information reporting requirements for PFIC shareholders. Annual information reports
of PFIC shareholders are provided on Form 8621, "Information Return by a Shareholder

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of a Passive Foreign Investment Company or Qualified Electing Fund." Under section
6501(c)(8), the period of limitation for assessment of tax with respect to periods for
which reporting is required under section 1298(f) will not expire before three years after
the date on which the IRS receives Form 8621 for the taxable year.

.02 PFIC Stock Marked to Market Under Section 475 or Another Chapter 1 Code
Provision Other than Section 1296

Section 1291(d)(1) provides that, subject to the coordination rules provided in section
1296(j), section 1291 does not apply if an election under section 1296(k) is in effect for
the taxpayer's taxable year. Section 1291(d)(1) further provides that, subject to
coordination rules similar to the rules of section 1296(j), section 1291 also does not
apply in the case of PFIC stock that is marked to market under any other provision of
chapter 1 of the Code (a non-section 1296 MTM regime), including section 475. The
regulations under section 1291 incorporate these rules, provide guidance on the
coordination rules, and clarify that the section 1291(d)(1) rule applies with respect to a
non-section 1296 MTM regime regardless of whether the applicable mark to market
regime is mandatory or elective. §1.1291-1(c)(4). The coordination rule relevant to a
non-section 1296 MTM regime applies to the first taxable year in which a U.S. person
marks to market the PFIC stock if, during the U.S. person's holding period (as defined in
section 1291(a)(3)(A) and §1.1296-1(f)), the foreign corporation was a PFIC for any
taxable year prior to such first taxable year and the corporation was not treated as a
QEF with respect to the U.S. person. Section 1291(d)(1) and §1.1291-1(c)(4)(ii).
Subject to this coordination rule, U.S. persons that hold PFIC stock that has been

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marked to market under a non-section 1296 MTM regime are not subject to tax under
any of the PFIC regimes. See also §§1.1295-1(i)(3) and 1.1296-1(h)(3).

For example, in cases in which a U.S. person properly marks to market under
section 475 its PFIC stock in the first year and each succeeding year that it holds the
stock, the U.S. person will not be subject to any of the PFIC regimes with respect to the
stock. Rather, the U.S. person will be required to report any gain with respect to the
PFIC stock under the rules of section 475. However, a U.S. person that is subject to
section 475 (either because the U.S. person is a dealer in securities under section 475
or has made a valid and timely election under section 475(f)) may not be required under
section 475 to mark to market certain stock, such as stock that it holds for investment or
as a hedge. See section 475(b)(1)(A) and (C). A U.S. person will be subject to tax
under the PFIC regimes with respect to any PFIC stock that is not marked to market
under a non-section 1296 MTM regime.

## .03 Section 1298(f) Information Reporting Regulations

On December 31, 2013, the Treasury Department and the IRS published temporary
and proposed regulations under sections 1291 and 1298 (2014-3 I.R.B. 394), which
included guidance under section 1298(f) on the annual filing requirements for
shareholders of PFICs. §1.1298-1T. The regulations generally are effective for taxable
years of shareholders ending on or after December 31, 2013. §1.1298-1T(h).

Under §1.1298-1T(b), a U.S. person that directly owns stock in a PFIC or that is an
indirect shareholder of a PFIC generally is required to file a Form 8621. Section
1.1298-1T(b) provides certain exceptions from the information reporting requirements,
including an exception that can apply when the aggregate value of PFIC stock held by a

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shareholder is less than a specified threshold. §§1.1298-1T(c)(2)(i)(A)(1) and 1.1298-
1T(c)(2)(iii).

The §1.1298-1T regulations do not provide an exception from the information
reporting requirements for shareholders of PFIC stock that is marked to market under a
non-section 1296 MTM regime. Thus, a U.S. person that owns PFIC stock that is
marked to market under a non-section 1296 MTM regime is subject to the generally
applicable rules in §1.1298-1T that apply to direct and indirect shareholders that own
PFIC stock.

SECTION 3. SECTION 1298(f) INFORMATION REPORTING FOR U.S. PERSONS
THAT OWN AN INTEREST IN A PFIC THAT IS MARKED TO MARKET UNDER A
NON-SECTION 1296 MTM REGIME

The Treasury Department and the IRS have determined that a U.S. person that
holds PFIC stock that is marked to market under a non-section 1296 MTM regime
generally should not be subject to the reporting requirements of §1.1298-1T with
respect to that stock. Accordingly, the Treasury Department and the IRS will amend
§1.1298-1T to provide an exception from the reporting requirements of §1.1298-1T for a
U.S. person with respect to PFIC stock that is marked to market under a non-section
1296 MTM regime, except that the exception will not be available for a taxable year in
which the U.S. person is required to apply the rules of section 1291 with respect to the
PFIC stock pursuant to the coordination rules in §1.1291-1(c)(4)(ii). The exception from
the reporting requirements of §1.1298-1T will not be available to the extent PFIC stock
held by a U.S. person is not in fact marked to market for any reason, including, for
example, because it is treated as held for investment or as a hedge under section 475.
In addition, the regulations will be revised to provide that a shareholder that is not

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subject to section 1298(f) information reporting with respect to PFIC stock that is
marked to market under a non-section 1296 MTM regime is not required to take the
value of the stock into account for purposes of determining whether it exceeds the
relevant threshold under §1.1298-1T(c)(2)(i)(A)(1) or §1.1298-1T(c)(2)(iii).

If a U.S. person is not subject to the reporting requirements of section 1298(f) with
respect to PFIC stock for a taxable year pursuant to the regulations, the failure to
furnish Form 8621 with respect to the PFIC stock does not result in the extension of the
period of limitation for the taxable year under section 6501(c)(8). Accordingly, the IRS
will not assert that the period of limitation is extended for any taxable year of any
shareholder of PFIC stock that appropriately relies on the rules described in this notice
prior to the issuance of final regulations.

# SECTION 4. EFFECTIVE DATE

Shareholders may rely on the rules described in Section 3 of this notice for their
taxable years ending on or after December 31, 2013. The provisions of the future final
regulations incorporating the guidance described in Section 3 of this notice will be
effective for taxable years of shareholders ending on or after December 31, 2013.
SECTION 5. DRAFTING INFORMATION

The principal author of this notice is Rose E. Jenkins of the Office of Associate Chief
Counsel (International). For further information regarding this notice contact Rose E.
Jenkins at (202) 317-6934 (not a toll-free call).