An investor who did not know his foreign company was a PFIC gets to make a late QEF election

Plain-English summary

A passive foreign investment company (PFIC) is a foreign corporation with mostly passive income or assets, and U.S. investors in a PFIC face harsh default tax treatment unless they elect to treat it as a "qualified electing fund" (QEF), which instead taxes them currently on their share of the company's earnings. A QEF election is normally due by the tax return deadline, but the regulations let a shareholder ask the IRS to consent to a retroactive election if the shareholder reasonably relied on a qualified tax professional, the request comes before the IRS raises the PFIC issue on audit, and granting it will not prejudice the government. Here a U.S. investor was one of the initial investors in a non-publicly-traded foreign corporation and did not know it was a PFIC; his accounting firm, though competent in international tax, also failed to spot the PFIC status and never advised him about a QEF election. After discovering the problem, he sought consent to make the election retroactive to the first year. The IRS concluded he met all the requirements of Treasury Regulation section 1.1295-3(f) and granted consent to make the retroactive QEF election, provided he follows the time-and-manner rules. This lets the investor avoid the punitive default PFIC regime despite having missed the original election deadline.

Ruling snapshot

• Question: May a shareholder who reasonably relied on a tax professional that missed his foreign company's PFIC status make a retroactive QEF election?
• Outcome: approved (consent granted to make the QEF election retroactive to the first year)
• Key authorities: IRC §§ 1295(b), 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: 201911001                                             [Third Party Communication:
Release Date: 3/15/2019                                       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-108239-18
                                                              Date:
                                                              December 11, 2018

                  TY: -------

Legend

Taxpayer                   = -----------------------
-------------------------------------------------------
FC                         = -------------------------
Country X                  = ------------
Year 1                     = -------
Year 2                     = -------
Accounting Firm            = ----------------------------------
Accountant Y               = ----------------------

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

      This is in response to a letter submitted on behalf of Taxpayer by his authorized
representative 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 investment in FC.

       The ruling contained in this letter is based upon information and representations
submitted on behalf of Taxpayer by his authorized representative, and accompanied by
a penalty of perjury statement executed by the appropriate parties. 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, at all relevant times, was a U.S. resident for U.S. federal income tax
purposes. In Year 1, Taxpayer was one of the initial investors of FC, a non-publicly
PLR-108239-18                                2

traded Country X corporation. Taxpayer was unaware that FC was a passive foreign
investment company (“PFIC”) as defined in section 1297(a) of the Code.

       During the relevant years, Taxpayer engaged the services of Accounting Firm for
tax services relating to the preparation of Taxpayer’s federal income tax returns.
Accountant Y with Accounting Firm was competent to render international tax advice,
including with respect to Taxpayer’s investment in FC. However, Accountant Y was
unaware that FC was a PFIC and, thus, did not advise Taxpayer of the consequences
of making or failing to make a QEF election with respect to FC. In Year 2, Taxpayer
became aware of the PFIC status of FC and took steps to take corrective action.

        Taxpayer submitted affidavits, signed under penalties of perjury, describing the
events that led to the failure to make the QEF election by the election due date.
Taxpayer represents that, in all of the relevant years: (i) FC was not identified as PFIC;
and (ii) Taxpayer did not receive any advice regarding the availability of a QEF election
with respect to his investment in FC.

       Taxpayer represents that, as of the date of the request for this ruling, the PFIC
status of FC had 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
retroactive to Year 1 for FC under Treas. Reg. §1.1295-3(f).

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 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:
PLR-108239-18                                 3

       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 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 representative.
PLR-108239-18                                  4


       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,



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




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