Taxpayer may make a retroactive qualified electing fund election

Plain-English summary

The IRS consented to a taxpayer's retroactive election to treat stock in a passive foreign investment company as stock in a qualified electing fund. The taxpayer had relied on a qualified tax professional who did not identify the foreign corporation as a PFIC or advise about the QEF election. The IRS found that the taxpayer satisfied the conditions in Treas. Reg. § 1.1295-3(f), including the reliance, government-interest, audit-status, and procedural requirements. The taxpayer must still follow the timing and manner rules for making the retroactive election.

Ruling snapshot

• Question: May the taxpayer make a retroactive QEF election for the specified tax year under Treas. Reg. § 1.1295-3(f)?
• Outcome: Approved
• Key authorities: IRC §§ 1295(a), 1295(b), 1297; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201412006
Third Party Communication: None
Release Date: 3/21/2014
Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
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------------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:INTL:B2
PLR-131500-13
Date:
October 28, 2013

TY: --------

Legend

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

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

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

Year 1 = -------

Year 2 = -------

Tax Professional R = ------------------

Tax Professional S = -----------------------------

Tax Firm T = ------------------------- ------

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

This is in response to a letter dated July 12, 2013, submitted by your authorized representative 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 and Treas. Reg.
§1.1295-3(f) with respect to Taxpayer’s investment in FC.

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

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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

Taxpayer is a United States citizen residing in Country A. In Year 1, Taxpayer acquired shares in FC, a foreign corporation existing under the laws of Country A. Throughout its existence, FC was a publicly traded company actively engaged in mining exploration and development. FC’s business resulted in tax losses during each year of its operation and its income was limited to interest income it earned on its working capital bank deposits. As a result, FC constituted a passive foreign investment company (PFIC) within the meaning of section 1297 beginning in Year 1.

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

In Year 2, as part of ongoing negotiations regarding a proposed acquisition of FC, FC engaged Tax Firm T to represent it with respect to international tax and corporate matters. During the course of this engagement, Tax Firm T reviewed the income and assets of FC and determined that FC constituted a PFIC because of the interest income FC had earned on its working capital bank deposits, even though FC had otherwise sustained net losses during every year of its existence. Accordingly, Tax Firm T 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 R. Taxpayer represents that he provided information regarding the investment in FC to Tax Professional R 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 affidavits from Tax Professional R and Tax Professional S, a tax professional at Tax Firm T, 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.

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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) 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).

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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 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 faxed to your authorized representative.

Sincerely,

Jeffery G. Mitchell
Chief, Branch 2
(International)

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