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  1. If a 1.1296-1(d)(5)-like transition rule can’t be applied, then I agree that selling in the first year with MtM election will be in a gray area at best. Even if you hold the stock actually for more than 1 year because of this ambiguity, however, I guess it might still be better than to make a MtM election (made in the inheritance year) than treating it as a Section 1291 fund. With MtM election you can at least avoid the highest rate tax and interest penalty for the first year (and subsequent years before the current year if you hold it even longer). You may have to pay intermediate phantom tax for the first (and possibly subsequent) year. But if the plan is to sell it immediately after an actual hold period of 1 year, I think it can be acceptable and will still be much more preferable than the penalties for the Section 1291 fund.

  2. That’s a great suggestion. I had considered that option when writing this post as well as the possibility of the QEF election, but I am not sure if IRC §1296(j) would apply in the case of a MTM election or IRC §1298(b)(1) — the “once a PFIC, always a PFIC” rule — in the case of a QEF election.

    §1296(j) makes you do a quasi-purging deemed sale if your holding period is greater than one year, and §1298(b)(1) would force you to have to make a purging election simultaneously with QEF if your holding period is greater than one year.

    I’m really not sure how to solve this one. 🙂

  3. Regarding the holding period problem, perhaps another option might be to make the mark-to-market election in the first year (i.e., the year of inheritance), if the PFIC stock is marketable? I’m not sure if a similar transition rule as 1.1296-1(d)(5) applies, but if it does, it would be safe to sell the PFIC stock in the first year and make the MtM election in the tax return for that year.

  4. Those are good questions. Both are questions I plan to address in future posts. 🙂

  5. I wonder what would happen in the reverse case. If a foreigner inherits a PFIC owned by a US citizen/resident, or receives the PFIC as a gift, are there US tax consequences?

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