IRS permits a retroactive QEF election for a foreign investment

Plain-English summary

The IRS consented to a married couple's retroactive qualified electing fund election for an investment in a foreign corporation classified as a passive foreign investment company. The taxpayers had relied on a qualified tax professional who did not identify the corporation's PFIC status or advise them about the QEF election. They submitted affidavits, paid an amount intended to prevent prejudice to the United States, filed affected amended returns, and sought relief before the PFIC issue was raised on audit. The IRS concluded that the requirements of Treas. Reg. § 1.1295-3(f) were satisfied and granted consent, subject to the timing and filing rules for the retroactive election.

Ruling snapshot

• Question: Can the taxpayers make a retroactive QEF election for a foreign corporation after missing the original election deadline?
• Outcome: Approved, consent granted subject to Treas. Reg. § 1.1295-3(g)
• Key authorities: IRC §§ 1295 and 1297; Treas. Reg. § 1.1295-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201411001 Third Party Communication: None
Release Date: 3/14/2014 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
----------------------------------------------------- ------------------------, ID No. --------------
----------------------------- Telephone Number:
------------------------------ ----------------------
Refer Reply To:
In Re: CC:INTL:BO2
PLR-101014-13
Date:
November 25, 2013

              TY: -------

Legend

Taxpayers = -------------------------
-------------------

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

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

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

Year 1 = -------

Year 2 = -------

Tax Professional A = -------------------

Tax Firm B = ----------------------------------------

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

This is in response to a letter dated December 21, 2012, and supplemental
documentation, submitted by Taxpayers’ authorized representative, that requested the
consent of the Commissioner of the Internal Revenue Service (“Commissioner”) for
Taxpayers 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 Taxpayers’ investment in FC.
PLR-101014-13 2

The ruling contained in this letter is based upon information and representations
submitted on behalf of Taxpayer by their authorized representatives, 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

Taxpayers are married U.S. citizens who own an interest in FC, a foreign corporation
incorporated in Country X that constitutes a PFIC within the meaning of section 1297 of
the Code. Taxpayers initially acquired the interest in FC in Year 1.

For Year 1 through Year 2, Taxpayers engaged Tax Professional A for preparation of
their joint U.S. tax return. Tax Professional A is an experienced tax professional who is
qualified to provide tax advice on a wide variety of tax matters, including international
tax. Tax Professional A advised Taxpayers with regard to U.S. federal income tax
matters, including with respect to Taxpayers’ ownership of FC. Taxpayers relied on Tax
Professional A 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 specific
tax treatment.

In Year 2, Taxpayers received an annual information statement from FC, which led
them to consult further with Tax Professional A. After reviewing Taxpayers’ holdings in
FC, Tax Professional A determined that FC was a PFIC under section 1297 for Year 1
through Year 2. Based on Tax Professional A’s determination regarding the PFIC
status of FC, Taxpayers requested that Tax Firm B submit a private letter ruling request
on behalf of Taxpayers to make a retroactive QEF election with respect to FC under
Treas. Reg. §1.1295-3(f), retroactive to Year 1, and effective for all subsequent years.

Taxpayers have 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 A. Taxpayers provided information regarding their ownership of
FC to Tax Professional A and Tax Professional A had access to all relevant information
with respect to FC. Taxpayers represent that, in the relevant years: (1) FC was not
identified as a PFIC; and (2) Taxpayers did not receive any advice regarding the
availability of a QEF election with respect to FC. Taxpayers have also submitted an
affidavit from Tax Professional A corroborating the representations made by Taxpayers
with respect to the discovery of FC’s PFIC status.

Taxpayers have paid an amount sufficient to eliminate any prejudice to the United
States government as a consequence of an inability to file amended returns, in
accordance with a closing agreement between Taxpayers and the Commissioner.
PLR-101014-13 3

Further, Taxpayers filed an amended return for each of their subsequent taxable years
affected by the retroactive election, if any.

Taxpayers represent 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

Taxpayers request the consent of the Commissioner to make a retroactive QEF election
with respect to FC under Treas. Reg. §1.1295-3(f), retroactive to Year 1.

LAW

Section 1295(a) of the Code provides that a PFIC will be treated as a QEF with respect
to a taxpayer if (1) an election by the taxpayer under 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:
PLR-101014-13 4

   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 Taxpayers’ ruling
request, we conclude that Taxpayers have satisfied Treas. Reg. §1.1295-3(f).
Accordingly, consent is granted to Taxpayers to make a retroactive QEF election with
respect to FC for Year 1, provided that Taxpayers comply with the rules under Treas.
Reg. §1.1295-3(g) regarding the time and manner for making the retroactive QEF
election. We have, accordingly, approved a closing agreement with Taxpayers with
respect to those issues affecting their tax liability on the basis set forth above. Pursuant
to 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
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 taxpayers 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 Taxpayers’ authorized representative.

                                    Sincerely,


                                    Barbara Rasch
                                    Senior Technical Reviewer
                                    (International)