PLR 1349011: IRS permits a retroactive QEF election after reliance on tax advisors

Plain-English summary

The IRS consented to a domestic partnership’s retroactive qualified electing fund election for an investment in a passive foreign investment company. The partnership had relied on two tax advisors who did not advise it about the QEF election or the consequences of failing to make it, and a later advisor identified the issue. The IRS found that the partnership satisfied the regulatory conditions, including eliminating prejudice to the government, obtaining the required annual information statements, and making the request before the PFIC issue was raised on audit. The consent was conditioned on compliance with the timing and manner rules for the retroactive election, and the IRS approved a related closing agreement.

Ruling snapshot

• Question: May the taxpayer make a retroactive QEF election under Treas. Reg. § 1.1295-3(f)?
• Outcome: Approved, subject to compliance with Treas. Reg. § 1.1295-3(g).
• Key authorities: IRC §§ 1295(a) and 1295(b); Treas. Reg. §§ 1.1295-3(f) and 1.1295-3(g)

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201349011 Third Party Communication: None
Release Date: 12/6/2013 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
----------------------------- -------------------------, ID No. --------------
--------------------------- Telephone Number:
------------------- ----------------------
-------------------------------- Refer Reply To:
CC:INTL:B02
PLR-141483-12
Date:
August 29, 2013

              TY:-------

Legend

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

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

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

GP = --------------
EIN = -----------------

Sole Owner = ----------------------
SSN = ------------------

LP = ----------------------------------------------
EIN = -----------------

x = --
y = ----

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

Date = -------------------

Tax Advisor 1 = ---------------------------------
PLR-141483-12 2

Tax Advisor 2 = -----------------------------------

Tax Advisor 3 = ----------------

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

This is in response to a letter dated December 22, 2010, and supplemental submissions
dated July 18, 2011 and January 13, 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 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

Shareholder is a domestic partnership, which was organized during Year 1 as a limited
partnership under the laws of State. GP, which is wholly owned by Sole Owner (a U.S.
citizen) and disregarded as an entity separate from Sole Owner for Federal tax
purposes, is the general partner of Shareholder and owns x percent of Shareholder.
LP, which is a charitable remainder unitrust as defined in section 664(a)(2), is the
limited partner of Shareholder and owns the remaining y percent of Shareholder.

Shareholder was funded with investment property, which was subsequently sold. The
proceeds from the sales were re-invested in portfolio assets, including cash, marketable
securities, hedge funds and private equity funds.

During Year 2, Shareholder acquired shares of FC, an entity treated as a corporation for
Federal tax purposes that was organized under the laws of Country. FC qualified as a
passive foreign investment company (“PFIC”) within the meaning of section 1297(a) for
Year 2 and all subsequent years.

Shareholder obtained tax advice and preparation service from Tax Advisor 1, from Year
1 through Date. Shareholder provided Tax Advisor 1 with all of the relevant information
with respect to its investment in FC. Tax Advisor 1 held itself out as a qualified tax
professional, and Shareholder reasonably believed that Tax Advisor 1 was competent to
render tax advice with respect to the ownership of shares of a foreign corporation. Tax
PLR-141483-12 3

Advisor 1 advised Shareholder on various tax matters and prepared various tax returns,
including the Federal partnership return for Shareholder for Year 2 through Year 3.
During the course of its engagement, Tax Advisor 1 did not advise Shareholder of the
possibility of making a QEF election with respect to FC, and thus did not advise
Shareholder of the consequences of making, or failing to make, a QEF election.

Tax Advisor 2 was retained by Shareholder as of Date to prepare Shareholder’s Federal
partnership returns. Tax Advisor 2 prepared Shareholder’s Federal partnership return
for Year 4, and for all subsequent years. Shareholder provided Tax Advisor 2 with all of
the relevant information with respect to its investment in FC. Tax Advisor 2 held itself
out as a qualified tax professional, and Shareholder reasonably believed that Tax
Advisor 2 was competent to render tax advice with respect to the ownership of shares of
a foreign corporation. During the course of its engagement, Tax Advisor 2 did not
advise Shareholder of the possibility of making a QEF election with respect to FC, and
thus did not advise Shareholder of the consequences of making, or failing to make, a
QEF election.

During Year 5, Shareholder retained Tax Advisor 3 to review its income tax matters.
Tax Advisor 3 brought to Shareholder’s attention the availability of a QEF election and
the impact of failing to make a QEF election with respect to FC, and explained the
option for Shareholder to file a ruling request for a retroactive QEF election.
Shareholder subsequently requested and received PFIC annual information statements
(within the meaning of Treas. Reg. §1.1295-1(g)(1)) for FC for the applicable years at
issue.

An amount sufficient to eliminate any prejudice to the U.S. government as a
consequence of an inability to file amended returns has been paid. Shareholder and
Sole Owner will enter into a closing agreement with the Commissioner that covers the
years for which Shareholder and Sole Owner are unable to file amended returns.
Further, Sole Owner has filed an amended return for the subsequent taxable year
affected by Shareholder’s retroactive election.

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 2 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
PLR-141483-12 4

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
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 2, 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.
PLR-141483-12 5

We will, accordingly, approve a closing agreement with Shareholder with respect to
those issues affecting its tax liability on the basis set forth above. The necessary
closing agreement for Shareholder has been prepared in triplicate and is enclosed. In
pursuance of our practice with respect to such agreements, the agreement contains a
stipulation to the effect that any change or modification of applicable statutes enacted
subsequent to the date of this agreement and made applicable to the taxable period
involved will render the agreement ineffective to the extent that it is dependent upon
such statutes.

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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