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US Outbound: IRS provides exception to PFIC reporting for certain marked-to-market stock

Sean Foley
Landon McGrew
The US Treasury Department and Internal Revenue Service (IRS) recently announced their intention to amend temporary regulations issued under section 1298(f) of the Internal Revenue Code to eliminate the requirement that a US person file a Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, with respect to investments in passive foreign investment company (PFIC) stock that is marked-to-market under any provision of the Internal Revenue Code, other than section 1296 (Notice 2014-51). The elimination of this filing requirement is particularly welcome for dealers that mark-to-market their investments in PFIC stock under section 475.

As general background, a foreign corporation is a PFIC as defined in section 1297 if either (i) 75% or more of its gross income is passive income or (ii) 50% or more of the average value of its assets is held for the production of passive income. Sections 1291 through 1298 provide for three separate tax regimes for US holders of PFIC stock: (i) the excess distribution rules under section 1291; (ii) the qualified electing fund rules under section 1293; and (iii) the mark-to-market rules under section 1296. Section 1291(d)(1) provides a coordination rule for these three tax regimes, and extends that coordination rule to PFIC stock that is marked-to-market under other provisions of the Code, including section 475. Thus, the coordination rule provides that US holders of PFIC stock that is marked-to-market under any provision of the Code other than section 1296 are not subject to tax under any of the three PFIC regimes described above.

On December 31 2013, the Treasury Department and IRS issued temporary regulations under section 1298(f) providing that a US holder of PFIC stock is required to file a Form 8621 annually with respect to its investment in the PFIC. The temporary regulations provide certain exceptions to this filing requirement, including an exception where the aggregate value of PFIC stock is below a specified threshold. However, the temporary regulations did not provide an exception for holders of PFIC stock that is marked-to-market under a Code provision other than section 1296. Thus, the regulations required a US person that owned PFIC stock that was marked-to-market under, for example, section 475 to file a Form 8621.

In the Notice, the Treasury Department and IRS state that they have determined that a US holder of PFIC stock that is marked-to-market under a Code provision other than 1296 should not be required to file a Form 8621. Accordingly, the Notice provides a new exception. The exception will not, however, be available for taxable years in which the US person is required to apply the excess distribution rules of section 1291 pursuant to coordination rules in Reg. §1.1291-1(c)(4)(ii). In addition, the exception will not apply to the extent that PFIC stock is not in fact marked-to-market for any reason, including, for example, if it is treated as held for investment or as a hedge under section 475.

The Notice states that US holders of PFIC stock may rely on the new filing exception for taxable years ending on or after December 31 2013. The future final regulations incorporating the Notice will also have an effective date of December 31 2013.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

Sean Foley ( Washington, DC, and Landon McGrew (, McLean, VA
Tel: +1 202 533 5588
Fax: +1 202 315 3087

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