Partnership may make retroactive QEF election

Plain-English summary

A domestic partnership owned less than 10 percent of a foreign company and learned only after filing its return that the company had become a passive foreign investment company. The partnership had engaged accountants to prepare its return and requested permission to make a retroactive qualified electing fund election. The IRS found that the partnership satisfied the regulatory requirements, including professional reliance, protection of the government's interests, a request before the issue was raised on audit, and the required affidavits. It consented to a QEF election retroactive to the specified tax year, subject to the filing rules in Treasury Regulation Section 1.1295-3(g).

Ruling snapshot

• Question: May the partnership make a retroactive QEF election for its interest in the foreign company?
• Outcome: Approved, subject to the prescribed time and manner for filing the retroactive election.
• Key authorities: IRC § 1295; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202111002 Third Party Communication: None
Release Date: 3/19/2021 Date of Communication: Not Applicable
Index Number: 1295.02-00, 1295.02-02
Person To Contact:
----------------- --------------------, ID No. -----------------
---------------------------------------- Telephone Number:
------------------------------------ --------------------
--------------------------- Refer Reply To:
CC:INTL:B02
PLR-101802-20
Date:
December 21, 2020

                     TY:-------

Legend

Taxpayer = ------------------------------------------------------------------
Foreign Company = ---------------------------------
Country = ----------
Tax Year = -------
Date 1 = --------------------
Date 2 = ---------------------
Date 3 = ---------------------
Date 4 = -----------------
Date 5 = -------------------
Date 6 = --------------------------
Member A = ------------------------
Member B = -----------------
Accountants = ---------------------------------------------

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

This is in response to a letter dated December 10, 2019, and additional correspondence
dated February 17, 2020, submitted on Taxpayer’s behalf by an 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 Foreign Company.

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
PLR-101802-20 2

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

On Date 1, Taxpayer, a domestic limited liability company taxed as a partnership,
acquired an interest of less than 10 percent in Foreign Company, a company organized
in Country.

Taxpayer engaged Accountants to prepare its Form 1065 for Tax Year, which was due
on Date 2. Accountants filed Taxpayer’s Form 1065 before its due date, on Date 3. On
Date 4 (after Date 2 and Date 3), Foreign Company’s tax preparer informed Member A,
a member of Taxpayer, that Foreign Company had become a passive foreign
investment company (“PFIC”) in Tax Year. Member A, who is not a tax professional,
notified Member B, another member of Taxpayer, about the information he had received
from Foreign Company’s tax preparer. On Date 5, Member B informed Accountants
that Foreign Company had become a PFIC in Tax Year.

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. Taxpayer has agreed
to file amended returns for each of the subsequent taxable years affected by the
retroactive election, if any. Taxpayer represents that, as of the date of the request for
ruling, the PFIC status of Foreign Company 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 retroactive QEF election
under Treas. Reg. § 1.1295-3(f) for the tax year ending on Date 6.

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.
PLR-101802-20 3

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, we grant consent to Taxpayer to make a QEF election with respect to
Foreign Company retroactive to the tax year ending on Date 6, provided that Taxpayer
complies with the rules under Treas. Reg. § 1.1295-3(g) regarding the time for, and
manner of, making the retroactive 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-101802-20 4

A copy of this letter must be attached to any 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,

                                   /s/ Kristine A. Crabtree

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

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