IRS permits a retroactive qualified electing fund election after tax adviser error

Plain-English summary

The IRS consented to a taxpayer's retroactive qualified electing fund election for an investment in a passive foreign investment company. The taxpayer said a tax professional knew about the investment but failed to identify its PFIC status or advise about the QEF election until after the election deadline. The IRS found that the taxpayer satisfied the regulatory conditions, including reasonable reliance on a qualified tax professional and the absence of an IRS audit issue concerning the PFIC status. The consent was subject to following the rules for the time and manner of making the retroactive election.

Ruling snapshot

• Question: Could the taxpayer make a retroactive QEF election after relying on a tax professional?
• Outcome: Approved, consent granted subject to the applicable procedural rules.
• Key authorities: IRC § 1295; Treas. Reg. §§ 1.1295-3(f) and 1.1295-3(g).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201334034 Third Party Communication: None
Release Date: 8/23/2013 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
------------------------ ------------------------, ID No. --------------
Telephone Number:
---------------------------- ----------------------
-------------------------------------- Refer Reply To:
CC:INTL:B2
PLR-150618-12
Date:
May 02, 2013

              TY: -------

Legend

Taxpayer = --------------------
= ------------------

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

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

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

Date X = -------------------

r = -------

Tax Professional Q = -----------------------

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

This is in response to a letter dated March 26, 2012 and subsequent documentation
submitted by Taxpayer that requested the consent of the Commissioner of the Internal
Revenue Service (“Commissioner”) for Taxpayer 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 Taxpayer’s investment in FC.
PLR-150618-12 2

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer, 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

Beginning on Date X of Year 1, Taxpayer purchased r shares in FC, a Country A
corporation. Taxpayer continues to hold r shares in FC.

Since before Year 1, Taxpayer has relied on Tax Professional Q, a practicing CPA, for
tax advice as well as the accurate preparation of tax returns. Tax Professional Q was
aware of Taxpayer’s investment in FC, but failed to identify the investment as an
interest in a passive foreign investment company (PFIC). Consequently, Tax
Professional Q failed to properly advise Taxpayer of the availability of electing to treat
stock owned by the Taxpayer in FC as stock in a QEF for the tax year ended in Year 1
and subsequent tax years.

In Year 2, Taxpayer became aware of the possibility that his investment in FC might
constitute an investment in a PFIC and alerted Tax Professional Q of this concern. Tax
Professional Q discovered that Taxpayer’s interest in FC constituted an interest in a
PFIC and advised Taxpayer of the need to take corrective action.

Taxpayer has 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 Tax Professional Q. Taxpayer represents that he provided information regarding
the investment of FC to Tax Professional Q in Year 1 and subsequent years. Taxpayer
represents 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 his investment in FC. In addition, Taxpayer submitted an affidavit from
Tax Professional Q corroborating the representations made by Taxpayer with respect to
the discovery of FC’s PFIC status.

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 to make a retroactive QEF election
with respect to FC for Year 1 under Treas. Reg. §1.1295-3(f).
PLR-150618-12 3

LAW

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 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).

CONCLUSION

Based on the information submitted and representations made with Taxpayer’s ruling
request, we conclude that Taxpayer has satisfied Treas. Reg. §1.1295-3(f).
PLR-150618-12 4

Accordingly, consent is granted to Taxpayer to make a retroactive QEF election with
respect to FC for Year 1, provided that Taxpayer 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 who requested it. 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: