PLR 1220006: Consent granted for a retroactive qualified electing fund election

Plain-English summary

The IRS allowed a limited partnership to make a retroactive qualified electing fund election for an investment in a foreign corporation that appeared to be a passive foreign investment company. The partnership had relied on its tax adviser and initially understood that the company was an active business rather than a PFIC. After later testing identified possible PFIC status beginning with the first investment year, the partnership requested consent before the IRS raised the issue on audit. The IRS concluded that the requirements of Treas. Reg. § 1.1295-3(f) were satisfied and granted consent, subject to the rules governing the timing and manner of making the election.

Ruling snapshot

• Question: May the taxpayer make a retroactive QEF election for an earlier year after discovering that a foreign corporation may have been a PFIC?
• Outcome: Approved
• Key authorities: IRC §§ 1295 and 6110; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201220006 Third Party Communication: None
Release Date: 5/18/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1295.02-02 ------------------------, ID No. -------------
Telephone Number:
---------------------
---------------------------- Refer Reply To:
------------------------- CC:INTL:B02
------------------------------------------------------- PLR-120120-11
-------------------------------------------- Date:
------------------------- February 22, 2012

               ------------

Legend

Shareholder = -------------------------------------------------------
EIN = ----------------
Management Company = ---------------------------------------------

FC = -------------------------.

State = -------------
Country = -----------

y = --
z = ---

Advisor = ----------------------------------------

Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------

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

This is in response to a letter dated April 29, 2011 submitted by your authorized
representative that requested the consent of the Commissioner of the Internal Revenue
Service (“Commissioner”) for Shareholder to make a retroactive qualified electing fund
PLR-120120-11 2

("QEF") election under section 1295(b) of the Internal Revenue Code ("Code") and
Treas. Reg. §1.1295-3(f) with respect to Shareholder’s investment in FC.

The ruling contained in this letter is based upon information and representations
submitted on behalf of Shareholder by its authorized representatives, and accompanied
by a penalty 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

Shareholder is a limited partnership organized under the laws of State. Shareholder is
owned by y partners, one of which is a limited partnership owned by z taxable
individuals. During Year 1, Shareholder purchased shares of FC, which is a corporation
organized under the laws of Country. Shareholder purchased additional shares of FC
during Year 2, Year 3 and Year 4. Shareholder sold all of its shares of FC during Year
5.

FC is a privately owned energy development company formed in Year 1 and based in
Country. FC is focused on developing projects throughout the liquefied natural gas
delivery chain. Shareholder’s understanding is that FC does not engage in investment
activities, with the exception of short-term investment of working capital pending its
deployment. FC appears to have satisfied the asset test for classification as a passive
foreign investment company within the meaning of section 1297(a) (PFIC) during Year
1.

For the Year 1 through Year 5 tax years, Management Company, the management
company providing services to Shareholder, engaged Advisor for services, including
preparation of Shareholder’s U.S. federal partnership returns. Advisor, who employs
experienced tax professionals, advised Shareholder with regard to U.S. federal income
tax matters regarding Shareholder’s operations and investments. Shareholder relied on
Advisor to provide advice with respect to filing and reporting requirements in general, as
well as any elections or statements that would be necessary to elect a specific tax
treatment.

Information received by Management Company with respect to Shareholder’s initial
investment in FC did not indicate that FC was a PFIC. Management Company intended
to invest in an active development company. Shareholder, Management Company and
FC considered FC to be engaged in an active business and had no reason to believe
that FC could be categorized as a PFIC.

During Year 6, Shareholder engaged Advisor for tax preparation services. Advisor
tested FC during the annual process of reviewing and monitoring investments for PFIC
PLR-120120-11 3

purposes for the previous reporting period. At that time, the testing indicated that FC
appeared to have been a PFIC in Year 5. Advisor reviewed previous years and
determined that FC may have been a PFIC beginning in Year 1.

Shareholder 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

Shareholder requests 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
shareholder if (1) an election by the shareholder under Code section 1295(b) applies to
the PFIC for the taxable year; and (2) the PFIC complies with the requirements
prescribed by the Secretary for purposes of determining the ordinary earnings and net
capital gains of the company.

Under Code section 1295(b)(2), a QEF election may be made for a taxable year at any
time on or before the due date (determined with regard to extensions) for filing the
return for the taxable year. To the extent provided in regulations, the election may be
made after the due date if the shareholder failed to make an election by the due date
because the shareholder 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 company 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:
PLR-120120-11 4

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

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

CONCLUSION

Based on the information submitted and representations made with Shareholder’s ruling
request, we conclude that Shareholder has satisfied Treas. Reg. §1.1295-3(f).
Accordingly, consent is granted to Shareholder to make a retroactive QEF election with
respect to FC for Year 1, provided that Shareholder complies 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 requesting it. Code section
6110(k)(3) provides that it may not be used or cited as precedent.

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

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.

                                    Sincerely,



                                    Jeffery G. Mitchell
                                    Branch Chief, Branch 2
                                    (International)

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