PLR 1344008: Taxpayer may make a retroactive QEF election for a PFIC investment

Plain-English summary

An investor learned that a foreign corporation held in the investor's account was a passive foreign investment company and that a qualified electing fund election had not been made on time. The investor had provided the relevant information to an investment manager and a qualified tax professional, but neither identified the PFIC status or advised about the QEF election. The IRS consented to a retroactive QEF election because the regulatory requirements were satisfied, including reliance on a qualified tax professional, lack of audit prejudice, and submission of the required affidavits and procedural materials. The election remained subject to the time and manner rules in Treasury Regulation § 1.1295-3(g).

Ruling snapshot

• Question: Whether the taxpayer could make a retroactive qualified electing fund election for a foreign corporation.
• Outcome: Approved
• Key authorities: IRC § 1295; IRC § 1297; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201344008 [Third Party Communication:
Release Date: 11/1/2013 Date of Communication: Month DD, YYYY]
Index Number: 1295.02-02
Person To Contact:
-------------------- -----------------, ID No. -------------
------------------------ Telephone Number:
--------------------------------------------- ---------------------
---------------------------------------- Refer Reply To:
CC:INTL:B02
PLR-142935-12
Date:
May 06, 2013

     TY---------

Legend

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

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

Country X = -----------

Company A = ----------------------
Money Manager B = ------------------
Accountant C = ----------------------

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

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

   This is in response to your letter received by our office on October 4, 2012,

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) with respect to your investment in
FC.
PLR-142935-12 2

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer 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 the request for rulings, it is subject to verification on
examination.

FACTS

   Taxpayer is in the business of investing for its own account and has entered into

an investment advisory agreement with Company A pursuant to which Company A was
granted complete discretion (including all decisions to purchase and sell) to manage the
assets in Taxpayer’s account. Taxpayer’s main point of contact at Company A was
Money Manager B who was granted limited trading authorization for purchases and
sales of securities, options, and commodities. Taxpayer is a calendar year taxpayer
and uses the cash method of accounting.

   Beginning in Year 1, Company A purchased on behalf of Taxpayer shares of FC,

a County X corporation. Company A purchased on behalf of Taxpayer more shares of
FC in Years 2, 3, 4, 5, and 6. Money Manager B never received a prospectus from FC
advising its shareholders that it might be classified as a passive foreign investment
company (“PFIC”) as defined under section 1297 of the Code.

    During the years at issue, Taxpayer engaged the services of Accountant C, a

certified public accountant, to prepare its tax returns, including forms, statements,
election, and other tax compliance related items. Taxpayer forwarded all
documentation received from Company A to Accountant C each year. Taxpayer also
made available all other documents in its possession that were requested by
Accountant C in order for him to prepare all required tax forms, statements, elections,
and other tax compliance items. Accountant C was competent to render U.S. tax advice
with respect to stock ownership of a foreign corporation. Also, Accountant C had full
access to all the information and facts relating to Taxpayer’s ownership of FC stock and
Taxpayer relied on the advice of Accountant C with regards to complying with U.S. tax
laws.

    Neither Money Manager B nor Accountant C identified FC as a PFIC and both

failed to advise Taxpayer of the possibility of making, or the consequences of failing to
make, a QEF election with respect to FC. Taxpayer recently became aware of FC’s
status as a PFIC.

   Taxpayer has submitted affidavits, signed 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 Money Manager B and Accountant C. Taxpayer has also submitted
PLR-142935-12 3

affidavits from Company A and Money Manager B corroborating the statements made
by Taxpayer.

  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).

LAW

   Section 1295(a) of the Code 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 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-142935-12 4

   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).

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).
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 expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

  This ruling is directed only to the taxpayer requesting 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.

Alternatively, taxpayers filing their returns electronically may satisfy this requirement
attaching a statement to their return that provided the date and control number of the
letter ruling.

                                    Sincerely,



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

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