Consent granted for a retroactive QEF election on a PFIC investment

Plain-English summary

A U.S. financial-services firm held a minority stake, through a U.S. subsidiary, in a foreign special-purpose vehicle used in a building-redevelopment financing. That foreign company was a passive foreign investment company (PFIC), and U.S. shareholders of a PFIC usually want to make a "qualified electing fund" (QEF) election under IRC Section 1295, which lets them report the company's income currently and avoid the harsher default PFIC tax regime. The firm's in-house tax professional knew the company was a PFIC but failed to tell the compliance team to make the QEF election on time. The firm asked the IRS to consent to a late (retroactive) QEF election under Treasury Regulation § 1.1295-3(f), which is available when the shareholder reasonably relied on a qualified tax professional, the government is not prejudiced, and the request comes before the IRS raises the PFIC's status on audit. Finding all the requirements met, the IRS granted consent to make the QEF election retroactive to the original year, provided the firm follows the time-and-manner rules.

Ruling snapshot

• Question: Should the IRS consent to a retroactive QEF election for the taxpayer's PFIC investment under Treas. Reg. § 1.1295-3(f)?
• Outcome: Approved (consent granted, subject to compliance with Treas. Reg. § 1.1295-3(g))
• Key authorities: IRC § 1295(a)-(b); IRC § 1297(a); Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201837001 [Third Party Communication:
Release Date: 9/14/2018 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-104471-18

                                                           Date:
                                                           June 13, 2018




              TY: -------

Legend

Taxpayer = -----------------------------------------------------------------
-----------------------
FC 1 = ----------------------
FC 2 = --------------------
FC3 = --------------------------------------------------------------
Year 1 = -------
Year 2 = -------
State A = --------------
City X = -----------
Country Y = -----------------------
B = ----
C = -----
Employee D = -------------------------

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

   This is in response to a letter submitted by Taxpayer requesting the consent of

the Commissioner of the Internal Revenue Service ("Commissioner") to make a
retroactive qualified electing fund ("QEF") election under section 1295(b) of the Internal
Revenue Code (the "Code") and Treas. Reg. §1.1295-3(f) with respect to Taxpayer's
investments in FC1 for Year 1.

  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 financial services firm that was incorporated under the laws of

State A in Year 2. In Year 1, Taxpayer acted as arranger of a transaction to finance the
redevelopment of an office building in City X, Country Y (City X building). For this
transaction, FC1 was established as a special purpose vehicle as part of a combined
sale-leaseback and securitization transaction. FC1 was formed in Year 1 in Country Y.
FC2, an indirect wholly owned U.S. subsidiary of Taxpayer and a member of TP's U.S.
combined federal tax group, acquired a minority interest of B voting shares of FC1.

   Employee D of Taxpayer was a qualified tax professional and represented that

she was responsible for coordinating with Taxpayer's U.S. compliance personnel to
ensure that appropriate elections were included on relevant U.S. tax returns and that
Taxpayer's U.S. compliance personnel relied on her for this purpose. Employee D
determined that FC1 was a passive foreign investment company ("PFIC") as defined in
section 1297(a) of the Code at all relevant times. However, Employee D failed to advise
Taxpayer's U.S. compliance personnel of the consequences of making or failing to
make a QEF election with respect to Taxpayer's investment in FC1.

   Taxpayer submitted affidavits, under penalties of perjury, describing the events

that led to the failure to make the QEF election by the election due date. In addition,
Taxpayer represents that, as of the date of this request for ruling, the PFIC status of
FC1 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 QEF election

under Treas. Reg. §1.1295-3(f) with respect to its investment in FC1 for Year 1.

LAW

   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 the 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 Internal Revenue Service
      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 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 QEF election retroactive to Year
1 for FC provided that Taxpayer complies with the rules under Treas. Reg. §1.1295-3(g)
regarding the time and manner for making the retroactive QEF elections.

   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 representative.

                                   Sincerely,



                                   Kristine A. Crabtree
                                   Senior Technical Reviewer, Branch 2
                                   (International)

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