IRS Allows Sec. 1298(f) Filing Exemption for Certain Holders of Marked-to-Market PFIC Stock

By Alan Munro, J.D., CPA, Washington

Editor: Michael Dell, CPA

Foreign Income & Taxpayers

In Notice 2014-51, the IRS announced that it will amend the Sec. 1298(f) regulations to create an exception from its filing requirements for U.S. persons holding passive foreign investment company (PFIC) stock that is marked to market under Sec. 475 or another Code section other than Sec. 1296.

On Dec. 31, 2013, the IRS published temporary and proposed regulations on reporting requirements applicable to shareholders of a PFIC under Sec. 1298(f). The temporary regulations, effective for tax years ending on or after Dec. 31, 2013, increase the number of situations when a U.S. person who is a direct or indirect shareholder of a PFIC must file an annual report on Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Failure to comply with the new rules can indefinitely extend the statute of limitation for the entire return under Sec. 6501(c)(8). The temporary regulations included certain exceptions to the filing requirements, but they did not include an exception from the reporting requirements for shareholders of PFIC stock that is marked to market under a Code section other than Sec. 1296 (such as Sec. 475).

The IRS concluded that U.S. persons holding stock that is marked to market under sections other than Sec. 1296 should not be subject to the reporting requirements included in the temporary regulations. Accordingly, the IRS announced its intention to amend Temp. Regs. Sec. 1.1298-1T to create an exception. Nonetheless, special rules may apply to a taxpayer making a non-Sec. 1296 mark-to-market election if it held PFIC stock in the prior year. In addition, the exception will not apply to the extent PFIC stock held by a U.S. person is not in fact marked to market for any reason (e.g., because it is treated as held for investment or as a hedge under Sec. 475). For taxpayers to whom the exception does apply, the IRS will not assert that the statute of limitation is extended for failure to file Form 8621. Taxpayers may rely on the guidance in Notice 2014-51 for tax years ending on or after Dec. 31, 2013.


Various organizations had reached out to Treasury in an effort to emphasize the burden the new regulation placed on taxpayers with a high degree of trading activity. In addition, these taxpayers explained that the increased reporting would provide the IRS with little or no benefit since they were already including all of the associated income under their mark-to-market method of tax accounting (see, e.g., a comment letter to the IRS from the Securities Industry and Financial Markets Association, May 22, 2014, which is available for download at

Accordingly, Notice 2014-51 is welcome relief from a reporting requirement that generally would not provide any useful information to the IRS and might otherwise serve only to keep a taxpayer's statute of limitation open. Although taxpayers can rely on Notice 2014-51 for calendar year 2013 returns, with the 2013 filing season over, the notice effectively may just eliminate the statute of limitation risk for taxpayers who inadvertently missed the reporting requirement under the law predating the notice.

A version of this item appeared in Ernst & Young's Global Tax Alert.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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