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

Plain-English summary

A U.S. investor (a domestic trust) held stock in a foreign corporation that was 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 trust's accounting firm did not recognize that the foreign company was a PFIC and never advised the trust to make the QEF election, so the deadline passed. The trust 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 trust reasonably relied on its tax advisers, 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.

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(b) and 1297(a); Treas. Reg. § 1.1295-3(f)

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202229034                                             Third Party Communication: None
 Release Date: 7/22/2022                                       Date of Communication: Not Applicable
 Index Number: 1295.02-02
                                                               Person To Contact:
 ---------------------                                         -----------------------, ID No. -----------------
 ----------------------------------------------------------    Telephone Number:
 -----------------------------------------------               --------------------
 ------------------------------------                          Refer Reply To:
                                                               CC:INTL:B02
                                                               PLR-125163-19
                                                               Date:
                                                               April 26, 2022




                 TY: ----------------

Legend

 Taxpayer                       =    ------------------------------------------------------------------------
                                =
 FC                             =    ---------------------------------------------
                                =
 Country                        =    ---------------------------
                                =
 Accounting Firm                =    -----------------------------------------
                                =
 Year 1                         =    -------
 Year 2                         =    -------
 Date X                         =    ---------------------

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

This is in response to a letter submitted by your authorized representative that
requested the consent of the Commissioner of the Internal Revenue Service
(“Commissioner”) for Taxpayer to make a retroactive qualified electing fund (“QEF”)
election under section 1295(b) of the Internal Revenue Code (“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 its authorized representative, 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 this request for ruling, such
material is subject to verification on examination. The information submitted in the
request is substantially as set forth below.
PLR-125163-19                                 2

FACTS

Taxpayer is a domestic trust that has filed its federal income tax return for all tax years
relevant to this letter ruling.

In Year 1, Taxpayer invested in FC, a company organized under the laws of Country
and treated as a corporation for U.S. income tax purposes. FC was at all relevant times
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.
Accounting Firm was competent to render international tax advice with respect to
Taxpayer’s investment in FC.

Taxpayer disclosed its investment in FC to Accounting Firm. However, Accounting Firm
failed to identify FC’s PFIC status. Consequently, Accounting Firm failed to advise
Taxpayer on FC’s PFIC status, the significance of FC being a PFIC, the availability of a
QEF election, and the consequences of making or failing to make a QEF election with
respect to FC. In Year 2, Accounting Firm became aware of FC’s PFIC status and
discovered the missed election with respect to FC.

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 its request for 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 with respect to its investment in 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.
PLR-125163-19                                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, consent is granted to Taxpayer to make a retroactive QEF election with
respect to FC for Year 1, 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.
PLR-125163-19                                 4

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.

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.

In accordance with the Power of Attorney on file with this office, copies of this letter
ruling are being sent to your authorized representatives.

                                       Sincerely,

                                       /s/ Kristine A. Crabtree

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




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