Shareholder receives retroactive QEF election consent

Plain-English summary

A U.S. shareholder acquired an interest in a foreign holding company that was a passive foreign investment company. The shareholder gave a qualified accounting firm all relevant information, but the firm did not identify the PFIC issue or advise about a qualified electing fund election. After learning of the issue, the shareholder obtained advice and supplied the required affidavits before the IRS raised PFIC status on audit. The IRS consented to a retroactive QEF election, subject to the prescribed filing rules.

Ruling snapshot

• Question: May the shareholder make a retroactive QEF election for the first PFIC ownership year?
• Outcome: Approved, provided the shareholder follows the time-and-manner rules for the retroactive election.
• Key authorities: IRC §§ 1295 and 1297; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201519022 Third Party Communication: None
Release Date: 5/8/2015 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
------------------------- ---------------------, ID No. ------------
------------------------------------ Telephone Number:
----------------------------------------------- --------------------
Refer Reply To:
CC:INTL:B02
PLR-136967-14
Date:
January 20, 2015

              TY:------

Legend
Shareholder = --------------------------------------------------------------------------------------------
------------------------------------------
FC1 = ------------------------------------------------------
FC2 = ----------------------------------------
Country A = ---------------------
Country B = -------
Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Year 5 = ------
X = ---
Accounting = -------------------------------------------------------------------------------
Firm
Advisor = --------------------------------------------------
Month = --------------

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

This is in response to a letter dated September 25, 2014, submitted by Shareholder’s
authorized representatives, 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 FC1.

The ruling contained in this letter is based upon information and representations
submitted on behalf of Shareholder by its authorized representatives, 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
PLR-136967-14 2

material is subject to verification on examination. The information submitted in the
request is substantially as set forth below.

FACTS

Shareholder is a U.S. citizen and an executive of FC2, a company organized under the
laws of Country A that operates principally in Country B. FC1 is a holding company for
shares of FC2 that was organized under the laws of Country A in Year 2 and has been
a passive foreign investment company (PFIC) as defined in section 1297 since Year 2.
Shareholder acquired shares of FC1 in Year 2. Shareholder’s ownership has never
exceeded X% of the total outstanding shares of FC1.

Shareholder retained Accounting Firm to prepare all of his U.S. federal income tax
returns starting with the return for Year 1, including his return for Year 2. Accounting
Firm is competent to render tax advice to U.S. shareholders of foreign corporations.
Shareholder provided Accounting Firm all relevant facts and circumstances to prepare
his U.S. federal income tax returns. At no point before Month of Year 4 did Accounting
Firm indicate to Shareholder that FC1 might be a PFIC, and thus Shareholder was not
aware of the possibility of making a QEF election with respect to FC1. Shareholder
became aware that FC1 might be a PFIC in Month of Year 4, when Accounting Firm
discussed with Shareholder his ownership of non-US shares.

Once Shareholder became aware of the possibility that FC1 was a PFIC, Shareholder
sought advice from Advisor about the implications of ownership of shares in a PFIC.
Advisor provided Shareholder with advice about the implications of owning shares in a
PFIC, the availability of a retroactive QEF election, and the mechanics and benefits of
making such an election.

Shareholder has submitted an affidavit, signed under penalties of perjury, which
describes the events that led to the failure to make the QEF election with respect to FC1
by the election due date, including the role of Accounting Firm. Shareholder also
submitted an affidavit from Advisor, signed under penalties of perjury, corroborating the
statements made by Shareholder.

Shareholder represents that, as of the date of this request for ruling, the PFIC status of
FC1 has not been raised by the Internal Revenue Service (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 FC1 for Year 2 under Treas. Reg. §1.1295-3(f).

LAW
PLR-136967-14 3

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
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 IRS 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 FC1 for Year 2, provided that Shareholder complies with the rules under
PLR-136967-14 4

Treas. Reg. §1.1295-3(g) regarding the time and manner for making the retroactive
QEF election.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

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 representatives.

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,



                                   Barbara E. Rasch
                                   Senior Technical Reviewer, Branch 2
                                   (International)