Charitable trust received retroactive QEF election after repeated adviser failures

Plain-English summary

A domestic charitable trust invested in a foreign passive investment company, but two successive trustees and a later tax firm all failed to identify the PFIC status or advise the trust about a qualified electing fund election. After another shareholder raised the issue, the trust engaged a new firm and sought relief before the IRS raised the matter on audit. The IRS found the requirements of Treas. Reg. § 1.1295-3(f) satisfied and consented to a QEF election retroactive to the trust's first investment year, subject to the required filing procedures.

Ruling snapshot

• Question: Could the charitable trust make a retroactive QEF election after multiple qualified advisers failed to identify its PFIC investment?
• Outcome: Approved, subject to the time-and-manner rules for the retroactive election.
• Key authorities: IRC §§ 1295 and 1297; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201431027 Third Party Communication: None
Release Date: 8/1/2014 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
--------------------------------------------- -----------------------, ID No. -------------------
------------------- --------------------------------------------------
------------------------- Telephone Number:
------------------------------ --------------------
Refer Reply To:
CC:INTL:B02
PLR-103725-13
Date:
April 21, 2014

              TY:------

Legend

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

Trustee = --------------

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

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

Year 1 = ------

Year 2 = ------

Year 3 = ------

Year 4 = ------

Firm A = -------------------------------------------

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

Tax Firm C = ------------------------------

Tax Firm D = ----------------------------------

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

This is in response to a letter dated January 11, 2013, and supplemental
documentation, submitted by Taxpayer’s 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 ("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 its 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

Taxpayer is a domestic charitable trust that owns an interest in FC, a publicly-traded
foreign corporation incorporated in Country A that constitutes a passive foreign
investment company (PFIC) within the meaning of section 1297 of the Code. Taxpayer
initially acquired its interest in FC in Year 1 and has acquired additional shares since
Year 1.

From Year 1 to Year 2, Taxpayer engaged Firm A to serve as its trustee. From Year 2
to Year 3, Taxpayer engaged Firm B to serve as its trustee. The responsibilities of
Taxpayer’s trustee included preparing income tax returns. Since Year 3, Taxpayer has
engaged Tax Firm C for the preparation of its U.S. tax return. Firm A, Firm B, and Tax
Firm C are qualified to provide tax advice on international tax matters, including issues
related to PFICs. Firm A, Firm B, and Tax Firm C advised Taxpayer with regard to U.S.
federal income tax matters, including with respect to Taxpayer’s ownership of FC.
Taxpayer relied on Firm A, Firm B, and Tax Firm C 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. Firm A, Firm B, and Tax Firm C did
not identify FC as a PFIC and, as such, did not advise Taxpayer regarding any potential
PFIC reporting requirements or available elections.

In Year 4, another shareholder in FC contacted Taxpayer about the potential PFIC
status of FC, which led Taxpayer to consult further with Tax Firm C. After discussing
the issue with Tax Firm C, Taxpayer retained Tax Firm D to help Taxpayer come into
compliance. Based on the determination that FC had likely been a PFIC since before
Year 1, Taxpayer requested Tax Firm D to submit a private letter ruling request on
Taxpayer’s behalf to make a retroactive QEF election with respect to FC under Treas.
Reg. §1.1295-3(f), retroactive to Year 1.

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
roles of Firm A, Firm B, and Tax Firm C. Taxpayer provided information regarding its
ownership of FC to Firm A, Firm B, and Tax Firm C, and Firm A, Firm B, and Tax Firm C
had access to all relevant information with respect to FC. Taxpayer represents that, in
the relevant 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 FC.
Taxpayer has also submitted an affidavit from Tax Firm C 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.

RULING REQUESTED

Taxpayer requests 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:

   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 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 sent to Taxpayer’s authorized representative.

                                    Sincerely,


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