PLR 200926006: S corporation may make retroactive QEF election

Plain-English summary

An S corporation purchased stock in a foreign corporation that was a passive foreign investment company. Its longtime CPA failed to identify the corporation as a PFIC or advise it about a qualified electing fund election. The IRS found that the S corporation reasonably relied on a qualified tax professional, that relief would not prejudice the government, and that it applied before the PFIC issue was raised on audit. It consented to a retroactive QEF election, provided the taxpayer followed the prescribed filing rules.

Ruling snapshot

• Question: Could the S corporation make a retroactive QEF election after its CPA failed to identify the foreign corporation as a PFIC?
• Outcome: Approved
• Key authorities: IRC §§ 1293 and 1295; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200926006
[Third Party Communication:
Release Date: 6/26/2009
Date of Communication: Month DD, YYYY]
Index Number: 1295.02-02
Person To Contact:
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-----------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:INTL:B02
PLR-105234-08
Date:
March 26, 2009

TYs: --------

Legend

FC = --------------
Taxpayer = -----------------------------------------
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Country X = ----------------------
State A = -------------

Date 1 = -------------------
Date 2 = -----------------
Year 1 = -------

N = ---

Accountant X = -------------------
Individual Y = ------------------------
= ------------------------
Accountant Firm Z = ---------------------------

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

This is in response to the letter received by our office on February 8, 2008, submitted by your 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).
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The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury 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.

FC is a Country X private limited company that was incorporated on Date 1, and is treated as a corporation for U.S. tax purposes. Taxpayer is a State A corporation that has elected to be treated as a S corporation. Taxpayer purchased N% of the stock in FC on Date 2.

Accountant X is a licensed Certified Public Accountant (“CPA”) in State A.
Accountant X has prepared the tax returns of Taxpayer since its formation. Specifically, Accountant X has prepared Taxpayer’s U.S. federal income tax returns, including all forms, statements, elections, or other compliance-related items. Accountant X’s areas of expertise are U.S. individual and small-business tax return preparation, and he also provides services involving audit and compilation of financial statements. Accountant X was also competent to assist with Taxpayer’s foreign investments, with the expectation that he would coordinate with or refer them to other advisors to the extent necessary. At all times, Accountant X had access to all of the facts and circumstances regarding the investments in FC by Taxpayer. However, Accountant X failed to identify FC as a PFIC and failed to advise Taxpayer of the possibility of making, or the consequences of failing to make, a QEF election with respect to FC.

Accountant Y was Taxpayer’s in-house controller. Accountant Y became a licensed CPA in State A in Year 1. Prior to obtaining her CPA license, Accountant Y did not provide international tax advice to Taxpayer. Subsequent to obtaining her CPA license, Individual Y began attending various U.S. international tax training seminars. Thereafter, while reviewing Taxpayer’s books and records for Year 1, Individual A recognized that there could be a PFIC issue with regard to Taxpayer’s investment in FC. Accordingly, Accountant Y contacted Accounting Firm Z seeking further international tax advice. Accounting Firm Z advised Taxpayer to file a request to make a retroactive QEF election under Treas. Reg. §1.1295-3(f).

Taxpayer has submitted affidavits, under penalties of perjury, describing the events that led to the failure to make the QEF election by the election due date, including the role of Accountant X and Accountant Y. In addition to preparing and filing Taxpayer’s U.S. federal income tax returns, Taxpayer represents that it relied on Accountant X for tax advice on various U.S. and international tax issues.

Taxpayer represents that the PFIC status of FC has not been raised by the IRS on audit for any of the taxable years.

RULING REQUESTED
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Taxpayer requests the consent of the Commissioner of the Internal Revenue Service to make a retroactive election under Treas. Reg. §1.1295-3(f) with respect to FC for Date 2.

LAW AND ANALYSIS

Section 1293(a) of the Code provides that every U.S. person who owns stock of a QEF at any time during the taxable year of such fund shall include in gross income (1) as ordinary income, such shareholder’s pro rata share of the ordinary earnings of such fund for such taxable year, and (2) as long-term capital gain, such shareholder’s pro rata share of the net capital gain of such fund for such taxable year.

Section 1295(a) 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.

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 knew or reasonably should have known that the tax professional
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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)

According to the facts submitted and the representations made, Taxpayer relied on the advice of Accountant X to prepare and file its U.S. federal income tax returns and to provide advice on U.S. and international tax issues. Accountant X failed to identify FC as a PFIC and failed to advise Taxpayer of the consequences of making, or failing to make, QEF elections. Accountant X was a CPA competent to render tax advice with respect to ownership of shares of a foreign corporation and who had access to all relevant facts and circumstances. Additionally, Taxpayer did not know, and should not reasonably be expected to have known, that FC was a PFIC, or of the availability of a QEF election. Thus, Taxpayer has satisfied the first requirement of Treas. Reg. §1.1295-3(f)(1) because Taxpayer reasonably relied on a qualified tax professional within the meaning of Treas. Reg. §1.1295-3(f)(2).

The second requirement is that granting consent in this case will not prejudice the interests of the United States government as provided in Treas. Reg. §1.1295- 3(f)(3). Pursuant to Treas. Reg. §1.1295-3(f)(3)(i), the interests of the United States 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 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 Taxpayer had made the QEF election by the election due date. Thus, Taxpayer has satisfied the second requirement of Treas. Reg. §1.1295-3(f)(1) because granting consent in this case will not prejudice the interests of the United States government.

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 Taxpayer has represented that the request to make a retroactive QEF election was made before a representative of the IRS raised the PFIC status of FC on 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).
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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.

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

According to the facts submitted and the representations made, Taxpayer has filed a complete 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).

Based on the information submitted and representations made:

Consent is granted to Taxpayer to make a retroactive QEF election with respect to FC for Date 2 under Treas. Reg. §1.1295-3(f), provided that Taxpayer complies with the rules under Treas. Reg. §1.1295-3(g) regarding the time and manner for making the retroactive QEF elections.

This private letter ruling is directed only to the 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 first and second representatives.

Sincerely,

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