Consent to make a late retroactive QEF election for a PFIC investment

Plain-English summary

A U.S. investor (a domestic limited partnership) bought a 10-percent interest in a foreign company that turned out to be a passive foreign investment company (PFIC). U.S. shareholders of a PFIC can elect to treat it as a "qualified electing fund" (QEF) under section 1295(b), which lets them pay tax currently on their share of the company's earnings instead of facing the harsher default PFIC tax and interest rules. The partnership's accountant, a CPA with over 35 years of experience, did not recognize that the foreign company was a PFIC and never advised making a QEF election, so the deadline passed. Years later a second accountant spotted the problem. The partnership asked the IRS to consent to a late, retroactive election under the "reasonable reliance on a qualified tax professional" rule in Treas. Reg. § 1.1295-3(f). Because the partnership reasonably relied on its tax adviser, the IRS had not raised the PFIC status on audit, and granting relief would not prejudice the government, the IRS consented to a QEF election retroactive to the first year of the investment, subject to the partnership filing amended returns and following the procedures in Treas. Reg. § 1.1295-3(g).

Ruling snapshot

• Question: May a PFIC shareholder who relied on a tax professional make a late retroactive QEF election under section 1295(b)?
• Outcome: approved
• Key authorities: IRC § 1295(a) and (b); Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

 Internal Revenue Service                                  Department of the Treasury
                                                           Washington, DC 20224

 Number: 202229008                                         Third Party Communication: None
 Release Date: 7/22/2022                                   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-114381-19
                                                           Date:
                                                           April 18, 2022

                          TY:--------


Legend

Taxpayer = ---------------------------------------------------------
Foreign Company = --------------------------------------------
Country = ------
Year 1 = -------
Year 2 = -------
Accountant A = -----------------------------------------------------
Accountant B = ----------------------------------------------------------------


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
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 ruling contained in this letter is based upon information and representations
submitted by 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

In Year 1, Taxpayer, a domestic limited partnership, obtained a 10-percent ownership
interest in Foreign Company, a company organized in Country. In the same year,
Taxpayer engaged Accountant A to provide tax consulting and compliance services.
PLR-114381-19                            2

Accountant A, a Certified Public Accountant with over 35 years of experience advising
on U.S. tax issues, failed to identify that Foreign Company was a passive foreign
investment company (“PFIC”) and neither advised Taxpayer about making a QEF
election nor prepared a Form 8621 for Foreign Company.

In Year 2 (several years later), Accountant B informed Taxpayer that Foreign Company
had been a PFIC since Year 1.

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 REQUSTED

Taxpayer requests the consent of the Commissioner to make a retroactive QEF election
under Treas. Reg. § 1.1295-3(f) with respect to Foreign Company 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).
PLR-114381-19                                 3


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 for Foreign
Company retroactive to Year 1, provided that Taxpayer complies with the rules under
Treas. Reg. § 1.1295-3(g) regarding the time for, and manner of, 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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.
PLR-114381-19                             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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