A retirement-services company may make retroactive QEF elections for six PFICs

Plain-English summary

A retirement-services company in a consolidated group invested in six foreign entities that were passive foreign investment companies. The company's internal tax department prepared the group's federal returns and was staffed by professionals expected to understand the tax consequences of foreign investments. Those professionals failed to identify the entities as PFICs or advise the company about qualified electing fund elections, causing the election deadlines to be missed. The company submitted sworn affidavits, agreed to amend affected later returns, and represented that the IRS had not raised PFIC status on audit. The IRS concluded that the company met Treas. Reg. § 1.1295-3(f) and allowed retroactive QEF elections for all six entities, subject to the regulation's time-and-manner requirements.

Ruling snapshot

• Question: May the company make retroactive QEF elections after its internal tax professionals failed to identify six investments as PFICs?
• Outcome: approved (retroactive elections are allowed if the company complies with Treas. Reg. § 1.1295-3(g))
• 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: 202023004                                             [Third Party Communication:
 Release Date: 6/5/2020                                        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-127313-16
                                                               Date:
                                                               February 21, 2020




                 TYs: --------------------

Legend

Taxpayer         =        ---------------------------------------------------------------------------
                          ------ ----------------
Company A =               ----------------------------------
                          ------------------------
State X          =        -------------
FC1              =        ----------------------------
FC2              =        --------------------------------
                          ------------------------
FC3              =        ---------------------------
                          ------------------------
FC4              =        --------------------------------
                          ------- ----------------
FC5              =        ----------------------------
                          ------------------------
FC6              =        --------------------------------
                          ------ ----------------
Date 1           =        ------------------
Date 2           =        ---------------
Date 3           =        ------------------
Year 1           =        -------
Year 2           =        -------


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

      This is in response to a letter submitted on Taxpayer’s behalf by an authorized
representative requesting the consent of the Commissioner of the Internal Revenue

PLR-127313-16                                 2

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, FC2, FC3, FC4, FC5, and
FC6 (collectively referred to as “FCs”).

      The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
support of the request for a ruling. Verification of the factual information,
representations, and other data submitted may be required as part of the audit process.

FACTS

        Company A is organized under the laws of State X and is the common parent of
an affiliated group, of which Taxpayer is a member. Taxpayer is organized under the
laws of State X and provides retirement services. Taxpayer invested in the following
vehicles:

          •   FC1 and FC2 on Date 1, Year 1,
          •   FC3 and FC4 on Date 2, Year 2, and
          •   FC5 and FC6 on Date 3, Year 2.

Each of the FCs was a passive foreign investment company (“PFIC”) as defined in
section 1297(a) during the relevant tax years.

         Taxpayer staffs an internal tax department that is responsible for preparing and
filing the consolidated U.S. federal income tax returns of Company A’s consolidated
group. Taxpayer’s tax department consists of tax professionals who are competent to
render tax advice on U.S. federal income tax matters, including the tax consequences of
a U.S. person owing stock in a foreign corporation. Company A relies on Taxpayer’s
tax department to prepare and file returns, including the making of any necessary or
desired elections. However, for the taxable years at issue, Taxpayer’s tax department
failed to identify FCs as PFICs and failed to advise Company A or Taxpayer of the
consequences of making or failing to make QEF elections with respect to FCs.

       Taxpayer submitted affidavits, under penalties of perjury, describing the events
that led to the failure to make the QEF elections by the election due dates. Taxpayer
represents that, in all of the relevant years: (i) FCs were not identified as PFICs; and (ii)
Taxpayer did not receive any advice regarding the availability of QEF elections with
respect to its interests in FCs.

       Taxpayer has agreed to file amended returns for each of the subsequent taxable
years affected by the retroactive elections, if any. Taxpayer represents that, as of the
date of the request for ruling, the PFIC status of FCs had not been raised by the IRS on
audit for any of the taxable years at issue.

PLR-127313-16                                 3


RULING REQUESTED

      Taxpayer requests the consent of the Commissioner to make QEF elections
under Treas. Reg. §1.1295-3(f) for FC1 and FC2 for Year 1; and FC3, FC4, FC5, and
FC6 for Year 2.

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.

PLR-127313-16                                 4

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 QEF elections for FC1 and FC2
retroactive to Year 1; and FC3, FC4, FC5, and FC6 retroactive to 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 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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