1 Pursuant to this election, a US shareholder generally includes in income each year an amount equal to the excess, if any, of
the fair market value of the shareholder’s PFIC stock as of the close of the taxable year over the shareholder’s adjusted basis
in such stock. Deductions for losses are allowable only to the extent of any net mark-to-market gains with respect to the
stock included in income by the shareholder for prior taxable years.
2 See Institute Memorandum to Tax Members No. 13-99, Unit Investment Trust Committee No. 5-99, and Closed-End
Investment Company Committee No. 10-99, dated March 3, 1999.
3 See Institute Memorandum to Tax Committee No. 10-99, Unit Investment Trust Committee No. 12-99, and Closed-End
Investment Company Committee No. 17-99, dated May 18, 1999.
[11641]
February 15, 2000
TO: CLOSED-END INVESTMENT COMPANY COMMITTEE No. 5-00
TAX COMMITTEE No. 7-00
UNIT INVESTMENT TRUST COMMITTEE No. 5-00
RE: FINAL MARK-TO-MARKET REGULATIONS FOR PASSIVE FOREIGN
INVESTMENT COMPANY STOCK
______________________________________________________________________________
The Treasury Department has issued final regulations (Treas. Reg. 1.1296(e)-1) regarding when
passive foreign investment company (“PFIC”) stock held by a shareholder is “marketable” and, thus,
eligible for the mark-to-market election of section 1296 of the Internal Revenue Code.1 Under the
statute, all PFIC stock held directly or indirectly by open-end regulated investment companies (“RICs”)
is eligible for the mark-to-market election. Similar statutory treatment is provided for PFIC stock held
by closed-end RICs that publish net asset values at least annually, except as provided in regulations.
In connection with the issuance of the regulations in proposed form,2 the Internal Revenue
Service requested comments on situations, if any, in which PFIC stock held by closed-end RICs should
not be treated as marketable. The Institute submitted comments to the Service recommending that the
final regulations always treat PFIC stock held by closed-end RICs as marketable.3
Pursuant to the preamble, the attached final regulations adopt the Institute’s recommendation
and treat PFIC stock held by closed-end RICs as marketable for purposes of section 1296. The
preamble explains that, at this time, the Internal Revenue Service and Treasury Department know of no
reason not to treat PFIC stock held by closed-end RICs as marketable. The text of the final regulations,
however, “reserves” on this issue in the event that a reason to treat PFIC stock held by closed-end RICs
differently is later determined.
The final regulations generally apply to taxable years of shareholders ending on or after January
25, 2000. Shareholders also generally may elect to apply the final regulations to any taxable year
beginning after December 31, 1997.
Deanna J. Flores
Assistant Counsel
Attachment