PLR 201142015: Retroactive QEF election permitted for PFIC investment

Plain-English summary

A married couple held an investment in a passive foreign investment company through trusts. Their tax adviser did not identify the investment as a PFIC or advise them about the qualified electing fund election under section 1295. After the issue was discovered, the taxpayers asked to make the election retroactively. The IRS consented to the retroactive election because the taxpayers satisfied the applicable requirements, including reliance on a qualified tax professional and the absence of an IRS audit challenge to the PFIC status.

Ruling snapshot

• Question: May the taxpayers make a retroactive qualified electing fund election for their PFIC investment?
• Outcome: Approved
• Key authorities: IRC § 1295; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201142015
Third Party Communication: None
Release Date: 10/21/2011
Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:INTL:B2
PLR-141154-10
Date:
July 18, 2011

TY: ---------------------

Legend

Taxpayer 1 = ---------------------
= -----------------

Taxpayer 2 = ---------------------
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FC = -------------

Country A = ---------------------------

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

p = ------

Accounting Firm R = ---------------

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

This is in response to a letter dated September 21, 2010 submitted by your authorized representative that requested the consent of the Commissioner of the Internal Revenue Service (“Commissioner”) for Taxpayer 1 and Taxpayer 2 (collectively, “Taxpayers”) to make a retroactive qualified electing fund ("QEF") election under section 1295(b) of the
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Internal Revenue Code ("Code") and Treas. Reg. §1.1295-3(f) with respect to Taxpayer’s investment in FC.

The ruling contained in this letter is based upon information and representations submitted on behalf of Taxpayers by their authorized representatives, and accompanied by a penalties of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of this request for ruling, such material is subject to verification on examination. The information submitted in the request is substantially as set forth below.

FACTS

Taxpayer 1 and Taxpayer 2 are married individuals who file a joint federal income tax return. Taxpayers hold a stock investment of p% in FC, a Country A corporation constituting a passive foreign investment company (“PFIC”). This stock investment in FC was made on behalf of Taxpayer 2 in Year 1 without the knowledge of the Taxpayers by trustees of two U.S. irrevocable trusts of which Taxpayer 1 is a beneficiary.

Since before Year 1, Taxpayers have relied on Accounting Firm R for tax advice as well as the accurate preparation of tax returns. Accounting Firm R became aware of the investment in FC during the preparation of the Year 1 trust returns. However, Accounting Firm R failed to ascertain the nature of the investment as well as the classification of FC as a foreign entity. Consequently, Accounting Firm R failed to properly advise the Taxpayers of the availability of electing to treat stock owned by the Taxpayers in FC as stock in a qualified electing fund for the tax year ended in Year 2 and subsequent tax years. However, upon discovery of the nature and entity classification of the investment in Year 3, Accounting Firm R advised Taxpayers of the need to take corrective action.

Taxpayers have submitted an affidavit, 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 Accounting Firm R. Taxpayers represent that they provided information regarding the investment of FC to Accounting Firm R in Year 1. Taxpayers represent that, in Year 1 and subsequent years: (1) FC was not identified as a PFIC; and (2) Taxpayer did not receive any advice regarding the availability of a QEF election with respect to the trust’s investment in FC. In addition, Taxpayers submitted an affidavit from Accounting Firm R corroborating the representations made by Taxpayers with respect to the discovery of FC’s PFIC status.

Taxpayers represent 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
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Taxpayers request the consent of the Commissioner to make a retroactive QEF election with respect to FC for Year 1 under Treas. Reg. §1.1295-3(f).

LAW

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

Under Code 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 shareholder 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 Treas. Reg. §1.1295- 3(f)(4).

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 that 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).
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CONCLUSION

Based on the information submitted and representations made with Taxpayers’ ruling request, we conclude that Taxpayers have satisfied Treas. Reg. §1.1295-3(f). Accordingly, consent is granted to Taxpayers to make a retroactive QEF election with respect to FC for Year 1, provided that Taxpayers comply with the rules under Treas. Reg. §1.1295-3(g) regarding the time and manner for making the retroactive QEF election.

Except as specifically set forth above, no opinion is expressed or implied concerning the U.S. federal tax consequences of the facts described above under any other provision of the Code.

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

A copy of this letter ruling must be attached to any federal income tax return to which it is relevant. Alternatively, taxpayers filing their returns electronically may satisfy this requirement by attaching a statement to their return that provides the date and control number of the letter ruling.

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

Sincerely,

Jeffery G. Mitchell
Chief, Branch 2
(International)

cc: