PLR 1322017: IRS consents to a retroactive qualified electing fund election

Plain-English summary

The IRS consented to a shareholder's retroactive qualified electing fund election for an investment in a foreign corporation. The shareholder had relied on a qualified tax professional that failed to identify the corporation as a passive foreign investment company and failed to advise about the election. The IRS found that the shareholder met the regulatory conditions for relief, including making the request before an IRS audit raised the corporation's PFIC status and submitting the required affidavits. The shareholder must follow the prescribed rules for the time and manner of making the retroactive election.

Ruling snapshot

• Question: Could the shareholder make a retroactive QEF election for the specified year?
• Outcome: Approved
• Key authorities: IRC §§ 1295 and 1297; Treas. Reg. § 1.1295-3(f) and (g); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201322017 Third Party Communication: None
Release Date: 5/31/2013 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
---------------------- ------------------------, ID No. -------------
------------------- Telephone Number:
--------------------------------------------- ---------------------
-------------------------------------- Refer Reply To:
---------------------------------- CC:INTL:B02
------------------- PLR-135843-12
-------------------- Date:
February 15, 2013

              TY:-------

Legend

Shareholder = ---------------------------------------------
EIN = ----------------

Predecessor = ------------------------------------

FC = -------------------------------------------------------

Foreign Partnership 1 = -------------------------------------
Foreign Partnership 2 = ----------------------------------------------
Foreign Partnership 3 = ------------------------------------------------------------

DE = ---------------------------------------

Investment Manager = ----------------------------------------
Accounting Firm 1 = --------------------------
Administrator = --------------------------------------------

Accounting Firm 2 = ----------------------------------------

State =--------------

Country 1 = ---------------------------
Country 2 = ------------------
Country 3 = --------

Year 1 = -------
PLR-135843-12 2

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

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

This is in response to a letter dated August 14, 2012 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
("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 representative, 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

Predecessor was a limited partnership organized under the laws of State. Prior to Year
1, Predecessor acquired an interest in Foreign Partnership 1, an entity treated as a
partnership for Federal income tax purposes that was formed under the laws of Country

1. Foreign Partnership 1 owned an interest in Foreign Partnership 2, an entity treated
   as a partnership for Federal income tax purposes that was formed under the laws of
   Country 1. Foreign Partnership 2, in turn, wholly owned DE, an entity formed under the
   laws of Country 2 that was treated as a disregarded entity for Federal income tax
   purposes. DE owned an interest in Foreign Partnership 3, an entity treated as a
   partnership for Federal income tax purposes that was formed under the laws of Country
   3, which owned real estate located in Country 3.

During Year 1, DE organized FC, an entity treated as a corporation for Federal income
tax purposes that was formed under the laws of Country 3 that was. At the end of Year
1, DE contributed its entire interest in Foreign Partnership 3 to FC.

During Year 2, Predecessor was split into three separate partnerships. As a result of
the split-up: (i) Predecessor underwent a technical termination; and (ii) Predecessor
became Shareholder, a new partnership for Federal income tax purposes, effective
immediately after the split-up. Shareholder is a limited partnership organized under the
laws of State. Subsequently during Year 2, Shareholder changed its name to its current
name. Shareholder owned the same interest in Foreign Partnership 1 after the split-up
that Predecessor owned in Foreign Partnership 1 before the split-up. For Federal
income tax purposes, Shareholder’s holding period in Foreign Partnership 1 includes
PLR-135843-12 3

the period during which Predecessor held Foreign Partnership 1 prior to the Year 2 split-
up.

At all relevant times, Investment Manager provided investment management services to
Predecessor and Shareholder. Investment Manager was responsible for all financial and
tax reporting requirements of Predecessor and Shareholder, including engaging tax
advisors and tax preparation agents in relation to all U.S. tax matters. For the Year 1
through Year 3 tax years, Investment Manager, on behalf of Predecessor and
Shareholder (as relevant), retained Accounting Firm 1 to provide advice with respect to
Federal income tax matters regarding Predecessor’s and Shareholder’s operations and
investments. In addition, at all relevant times Investment Manager, on behalf of
Predecessor and Shareholder, engaged Administrator to be Predecessor’s and
Shareholder’s administrator, and, in particular, to prepare U.S. federal, state and local
information tax returns for Predecessor and Shareholder, prepare U.S. federal and
required state Schedule K-1s for all partners, and prepare all PFIC statements advised
by Accounting Firm 1. Administrator retained Accounting Firm 1 to review and signoff
on the U.S. federal, state and local information tax returns and any elections
recommended by Accounting Firm 1 and prepared by Administrator. Accounting Firm 1
was retained on the basis that Accounting Firm 1 employed qualified experienced tax
professionals who were competent to render advice with respect to U.S. federal income
tax matters, including the consequences relating to U.S. persons owning stock of a
foreign corporation.

Predecessor, Shareholder, Investment Manager and Administrator made available to
Accounting Firm 1 the books and records of FC and any other information that
Accounting Firm 1 requested that was relevant to the provision of tax advice and the
review of Predecessor’s and Shareholder’s tax returns. Accounting Firm 1 failed to
identify FC as a PFIC and failed to advise Predecessor, Shareholder, Investment
Manager or Administrator of the consequences of making, or failing to make, a QEF
election with respect to Predecessor’s or Shareholder’s interest in FC.

During Year 3, Shareholder and Investment Manager engaged Accounting Firm 2 to
provide tax advice, tax planning, tax reporting and tax consulting services to Shareholder
and Investment Manager. Upon review of Shareholder’s structure, Accounting Firm 2
raised the possibility that FC was a PFIC under section 1297(a)(2). Based on Accounting
Firm 2’s determination regarding the PFIC status of FC, Shareholder requested that
Accounting Firm 2 begin the process of preparing a request for relief.

Shareholder has submitted an affidavit, under penalties of perjury, that describe the
events that led to its failure to make a QEF election with respect to FC by the election due
date, including the role of Accounting Firm. Shareholder also submitted an affidavit from
Accounting Firm 1, which describes Accounting Firm 1’s engagement and
PLR-135843-12 4

responsibilities, and the advice concerning the tax treatment of FC that it provided to
Shareholder. In addition, Shareholder submitted the PFIC Annual Information
Statements (described in §1.1295-1(g)(1)) for FC for taxable years Year 1 through Year
4, which provide that FC did not have any earnings and profits for Year 1 through Year
4.

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

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 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 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
PLR-135843-12 5

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 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
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. 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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