Investors received consent for retroactive QEF elections

Plain-English summary

Taxpayers held shares of a foreign corporation over several years and relied on an accountant for their U.S. tax and filing obligations. After the corporation warned that it was likely a passive foreign investment company, the taxpayers asked whether action was required. The accountant mentioned a qualified electing fund election but did not advise them about making one. The taxpayers later engaged an attorney, submitted affidavits describing both professionals' roles, and represented that the IRS had not raised the PFIC issue on audit. The IRS concluded that the regulatory conditions were satisfied and consented to retroactive QEF elections for the first year and all later years, subject to the prescribed filing rules.

Ruling snapshot

• Question: Could the taxpayers make retroactive QEF elections after their accountant failed to advise them properly about the PFIC election?
• Outcome: Approved, subject to the regulatory filing requirements
• 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: 201423004
Third Party Communication: None
Release Date: 6/6/2014
Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
---------------------------------
--------------------------, ID No. ----------------
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-------------------------------------------------- Telephone Number:
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Refer Reply To:
CC:INTL:B02
PLR-135245-13
Date: January 23, 2014

TY: -------

Legend

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

Trust = ---------------------------------------------------------------------------------
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Corporation = --------------------------------------------

Accountant = -----------------------------

Attorney = -------------------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

Month 4 = ---------------

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

This is in response to a letter dated August 13, 2013, submitted by your authorized representative, that requested the consent of the Commissioner of the Internal Revenue Service (“Commissioner”) to make a retroactive qualified electing fund
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(“QEF”) election under section 1295(b) of the Internal Revenue Code and Treas. Reg.
§1.1295-3(f) with respect to Corporation.

Taxpayers were shareholders of Corporation from Year 1 through Year 6.
Taxpayers acquired their shares of Corporation in a series of transactions beginning in Year 1and ending in Year 5.

Taxpayers were not aware that Corporation was a passive foreign investment company (“PFIC”) until Month 7, and were unaware of the availability of a qualified electing fund (“QEF”) election until Month 4. Taxpayers are not professionals and have relied on Accountant as their tax advisor concerning all applicable U.S. tax and filing obligations since Year 1. When Taxpayers received a notice in Year 3 from Corporation notifying them of the likelihood that it was a PFIC, they asked Accountant if they needed to take any action. Although Accountant asked if a QEF election had been made, Accountant did not advise them regarding such an election. In Month 4, Taxpayers engaged Attorney for advice regarding a QEF election.

Taxpayers have submitted affidavits, under penalties of perjury, that describe the events that led to their failure to make a QEF election with respect to Corporation by the election due date, including the roles of Accountant and Attorney. Taxpayers submitted an affidavit from Accountant, describing Accountant’s engagement and responsibilities and failure to advise Taxpayers to make a QEF election for Corporation. Taxpayers also submitted an affidavit from Attorney explaining Attorney’s engagement by Taxpayers and the advice provided regarding the availability of a retroactive QEF election for Corporation.

Taxpayers represent that, as of the date of this request for ruling, the PFIC status of Corporation 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 of the Internal Revenue Service to make a retroactive QEF election with respect to Corporation for Year and all subsequent years under Treas. Reg. §1.1295-3(f).

LAW AND ANALYSIS

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.
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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 §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 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, we conclude that Taxpayers have satisfied Treas. Reg. §1.1295-3(f). Consent is granted to Taxpayers to make a retroactive QEF election with respect to Corporation for Year 1 and all subsequent years under Treas. Reg. §1.1295-3(f), provided that they comply with the rules under Treas. Reg. §1.1295-3(g) regarding the time and manner for making the retroactive QEF election.

A copy of this ruling must be attached to any tax return to which it is relevant

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.
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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
Branch Chief, Branch 2
(International)