Investment partnership may make a retroactive QEF election

Plain-English summary

A privately held investment partnership acquired shares in a publicly traded foreign trust that was a passive foreign investment company. Although the partnership had sophisticated accounting personnel and access to a competent affiliated tax department, that department did not identify the trust as a PFIC or advise the partnership about a qualified electing fund election. The PFIC issue had not been raised on audit. The IRS concluded that the partnership met the requirements of Treasury Regulation § 1.1295-3(f) and allowed it to make a retroactive QEF election, subject to the time-and-manner rules in § 1.1295-3(g).

Ruling snapshot

• Question: May the partnership make a retroactive qualified electing fund election for its investment in a passive foreign investment company?
• Outcome: Approved
• Key authorities: IRC §§ 1295, 1297; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201528008                                              [Third Party Communication:
Release Date: 7/10/2015                                        Date of Communication: Month DD, YYYY]
Index Number: 1295.02-02
                                                               Person To Contact:
----------------------------                                   ----------------, ID No. ------------
-----------------------                                        Telephone Number:
--------------------                                           --------------------
--------------------------------                               Refer Reply To:
                                                               CC:INTL:B02
                                                               PLR-123834-11
                                                               Date:
                                                               March 27, 2015




         TY: ------

Legend

Taxpayer                   =        ----------------------------------------------------------
                           -----------------------
Manager                    =        --------------------------
FC                         =        ----------------------------
State X                    =        ------------
Country Y                  =        ----------
Year 1                     =        ------
Year 2                     =        ------




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

       This is in response to your letter received by our office on June 7, 2011,
requesting the consent of the Commissioner of the Internal Revenue Service 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 your investment in
FC.
PLR-123834-11                                2

      The rulings contained in this letter are based upon information and
representations submitted by the taxpayer 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 the request for rulings, it is subject to verification on
examination.

FACTS

       Taxpayer is a privately held State X limited partnership that was formed in Year

1. Taxpayer’s activities consist solely of managing financial investments on behalf of its
partners. Taxpayer is managed by a member of Manager, a large privately owned
group of affiliated entities with substantial real estate holdings, among other
investments. In Year 2, Taxpayer purchased shares of FC, a County Y publicly traded
trust. FC was a passive foreign investment company (“PFIC”) as defined under section
1297(a) of the Code.

       Taxpayer is a sophisticated investment and portfolio manager which maintains a
well-qualified staff of investment and accounting professionals. Taxpayer has systems
designed to capture and report critical financial, accounting, and tax information on a
timely basis. Further, Taxpayer has access to the professionals of Manager’s tax
department. Manager’s tax department was competent to render U.S. tax advice with
respect to stock ownership of a foreign corporation. Taxpayer relied on the advice of its
accounting professionals and Manager’s tax department to comply with U.S. tax laws.

        Manager’s tax department has full access to the accounting information with
respect to Taxpayer’s investment in FC. However, Manager’s tax department failed to
identify FC as a PFIC within the meaning of section 1297(a). Consequently, Manager’s
tax department failed to advise Taxpayer of the possibility of making a QEF election
under section 1295(b) with respect to FC and of the consequences of making, or failing
to make, such an election. Taxpayer recently became aware of FC’s status as a PFIC.

       Taxpayer has submitted an affidavit, signed 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 its accounting professionals and Manager’s tax department.

      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 for Year 2 under Treas. Reg. §1.1295-3(f).
PLR-123834-11                                 3

LAW

       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.

       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 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 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 with Taxpayer’s
ruling request, we conclude that Taxpayer has satisfied Treas. Reg. §1.1295-3(f).
PLR-123834-11                                 4

Accordingly, consent is granted to Taxpayer to make a retroactive QEF election with
respect to FC for Year 2, 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 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 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.

        A copy of this ruling must be attached to any tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement
attaching a statement to their return that provided the date and control number of the
letter ruling.

                                       Sincerely,



                                       Jeffery G. Mitchell
                                       Branch Chief
                                       (International)




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