PLR 200908020: Trust received consent for retroactive QEF election

Plain-English summary

A U.S. irrevocable nongrantor trust invested in a foreign mutual fund without realizing that the fund was a passive foreign investment company. The trust had relied for years on a qualified tax professional who knew the relevant facts but did not identify the fund's PFIC status or advise the trust to make a qualified electing fund election. The IRS found that the trust reasonably relied on the professional, requested relief before the issue arose on audit, satisfied the procedural requirements, and would not receive a lower aggregate tax liability from the late election. It therefore consented to a retroactive QEF election under Treas. Reg. § 1.1295-3(f), subject to the regulation's time-and-manner rules.

Ruling snapshot

• Question: Could the trust retroactively elect QEF treatment for its foreign mutual-fund investment?
• Outcome: Approved: the IRS consented to the retroactive election, provided the trust followed Treas. Reg. § 1.1295-3(g).
• Key authorities: IRC § 1295(a) and (b); Treas. Reg. § 1.1295-3(f) and (g).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200908020
[Third Party Communication:
Release Date: 2/20/2009
Date of Communication: Month DD, YYYY]
Index Number: 1295.02-02
Person To Contact:
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----------------, ID No. -------------
--------------------------------------------------------- Telephone Number:
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Refer Reply To:
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CC:INTL:B02
PLR-140247-07
Date:
November 17, 2008

TYs: --------

Legend

Taxpayer = ---------------------------------------------------------
Individual N = --------------------------
R = -------------
S = ---------------
FC = ------------------------------------------
Country X = ------------

Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------

Accountant O = --------------------
Accounting Firm P = ---------------------------------------------

Dear ---------------:

This is in response to your letter received by our office on September 13, 2007, submitted on behalf of Taxpayer by its authorized representative, requesting the consent of the Commissioner of the Internal Revenue Service to make a retroactive qualified electing fund (“QEF”) election under section 1295(b) of the Internal Revenue Code (“Code”) and Treas. Reg. §1.1295-3(f).

The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury

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statement executed by appropriate parties. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

FACTS

Taxpayer is a U.S. irrevocable non-grantor trust and Individual N is its acting Trust Officer. In Year 1, Taxpayer invested $R in S shares of FC, an open-end mutual fund incorporated as a company in Country X. In Year 4, while analyzing information in order to prepare Taxpayer’s Year 3 federal income tax return, Accountant O discovered that FC has been a PFIC since Year 1.

During the years at issue, Individual N, on behalf of Taxpayer, sought tax advice from Accountant O relating to Taxpayer’s investment in FC. Individual N represents that in all issues related to Taxpayer’s investment in FC, Taxpayer relied on the advice of Accountant O. Accountant O was aware of all the facts and circumstances relating to Taxpayer’s investment in FC. Accountant O is a tax professional competent to render advice on U.S. tax laws and has diligently advised Taxpayer on tax matters for over 25 years. Currently, Accountant O is a partner with Accounting Firm P.

Individual N, on behalf of Taxpayer, has submitted an affidavit, signed under penalties of perjury, describing the events that led to the failure to make the QEF election by the election due date, including his role and the role of Accountant O. Taxpayer has also submitted an affidavit of Accountant O corroborating the statements made by Taxpayer and Individual N.

Taxpayer represents that as of the date of this request for ruling, the PFIC status of FC has not been raised by the IRS on audit for any of the taxable years at issue.

RULING REQUESTED

Taxpayer requests the consent of the Commissioner of the Internal Revenue Service to make a retroactive QEF election with respect to FC for Year 1 under Treas. Reg. §1.1295-3(f).

LAW AND ANALYSIS

Section 1295(a) of the Code provides that any PFIC shall be treated as a QEF with respect to a taxpayer if (1) an election by the taxpayer under section 1295(b) applies to such company for the taxable year and (2) the company complies with such requirements as the Secretary may prescribe for purposes of determining the ordinary earnings and net capital gains of such company.

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Under section 1295(b)(2), a QEF election may be made for any taxable year at any time on or before the due date (determined with regard to extensions) for filing the return for such taxable year. To the extent provided in regulations, such an election may be made after such due date if the taxpayer failed to make an election by the due date because the taxpayer reasonably believed the company was not a PFIC.

Under Treas. Reg. §1.1295-3(f), a taxpayer may request the consent of the Commissioner to make a retroactive QEF election for a taxable year if:

1. the shareholder reasonably relied on a qualified tax professional, within the
   meaning of Treas. Reg. §1.1295-3(f)(2);
2. granting consent will not prejudice the interests of the United States government,
   as provided in Treas. Reg. §1.1295-3(f)(3);
3. the request is made before a representative of the Internal Revenue Service
   raises upon audit the PFIC status of the corporation for any taxable year of the
   shareholder; and

4. the shareholder satisfies the procedural requirements of §1.1295-3(f)(4).

   The first requirement is that the shareholder reasonably relied on a qualified tax
   professional, within the meaning of Treas. Reg. §1.1295-3(f)(2). A shareholder will not be considered to have reasonably relied on a qualified tax professional if the shareholder knew, or reasonably should have known, that the foreign corporation was a PFIC and knew of the availability of a section 1295 election. Treas. Reg. §1.1295- 3(f)(2)(i). In addition, a shareholder cannot claim reliance upon a qualified tax professional if he know or reasonably should have known that the tax professional relied upon was not competent to render tax advice with respect to the ownership of shares of a foreign corporation or did not have access to all the relevant facts and circumstances. Treas. Reg. §§1.1295-3(f)(2)(i)(A) and (B)

   Accountant O was competent to render U.S. tax advice with respect to stock
   

   ownership of a foreign corporation and had access to all the relevant facts and circumstances. She failed to advise Individual N and Taxpayer that FC was a PFIC, failed to make a QEF election on Taxpayer’s Year 1 federal income tax return, and failed to advise Individual N and Taxpayer of the consequences of failing to make such an election. Thus, Individual N and Taxpayer reasonably relied on a qualified tax professional within the meaning of Treas. Reg. §1.1295-3(f)(1)(i) and (2). Further, Individual N and Taxpayer did not know and should not reasonably be expected to have known that FC was a PFIC.

   The second requirement of Treas. Reg. §1.1295-3(f) is that granting consent will
   

   not prejudice the interests of the U.S. government. Under Treas. Reg. §1.1295- 3(f)(3)(i), the interests of the U.S. government are prejudiced if granting relief would result in the shareholder having a lower tax liability, taking into account applicable interest charges, in the aggregate for all years affected by the retroactive election (other

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than by a de minimis amount) than the shareholder would have had if the shareholder had made the section 1295 election by the election due date. The time value of money is taken into account for purposes of this computation.

According to the facts submitted and the representations made, the interests of the United States government are not prejudiced because the granting of relief does not result in Taxpayer having a lower tax liability than Taxpayer would have had if it had made the QEF election by the election due date.

The third requirement under Treas. Reg. §1.1295-3(f)(1) is that the request must be made before a representative of the IRS raises upon audit the PFIC status of the corporation for any taxable year of the shareholder. Taxpayer has satisfied the third requirement of Treas. Reg. §1.1295-3(f)(1) because it represents that the request to make a retroactive QEF election was made before a representative of the IRS raised the PFIC status of FC in an audit.

The final requirement under Treas. Reg. §1.1295-3(f)(1) is that the procedural requirements set forth in Treas. Reg. §1.1295-3(f)(4) must be met. The procedural requirements include filing a request for consent to make a retroactive election with, and submitting a user fee to, the Office of the Associate Chief Counsel (International). Treas. Reg. §1.1295-3(f)(4)(i). Additionally, affidavits signed under penalties of perjury must be submitted that describe:

1. the events which led to the failure to make a QEF election by the election due date;
2. the discovery of such failure;
3. the engagement and responsibilities of the qualified tax professional; and 4. the extent to which the shareholder relied on such professional,

must be submitted. Treas. Reg. §§1.1295-3(f)(4)(ii) and (iii).

According to the facts submitted and the representations made, Taxpayer has filed a completed ruling request, including the correct user fee, and submitted complete and appropriate affidavits. Thus, Taxpayer has satisfied the fourth requirement of Treas. Reg. §1.1295-3(f)(1).

CONCLUSION

Based on the information submitted and representations made:

Consent is granted to Taxpayer to make a retroactive QEF election with respect to FC for Year 1 under Treas. Reg. §1.1295-3(f), provided that it complies with the rules under Treas. Reg. §1.1295-3(g) regarding the time and manner for making the retroactive QEF election.

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This private letter ruling is directed only to Taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

A copy of this ruling must be attached to any tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to Taxpayer’s authorized representative.

Sincerely,

Ethan A. Atticks
Senior Technical Reviewer, Branch 2
(International)