Consent to a retroactive QEF election after an advisor missed the foreign company's PFIC status

Plain-English summary

A U.S. taxpayer owned an interest in a foreign company that was a passive foreign
investment company (a "PFIC"). PFIC ownership triggers unfavorable U.S. tax rules
unless the shareholder makes a "qualified electing fund" (QEF) election, which
generally must be filed by the tax return due date. Here the taxpayer's original
tax advisor never spotted that the foreign company was a PFIC and never prepared
the QEF election or the required Form 8621. A second advisor caught the problem
years later. The taxpayer asked the IRS to consent to a retroactive QEF election
under Treas. Reg. § 1.1295-3(f), which allows a late election if the shareholder
reasonably relied on a qualified tax professional, the government is not
prejudiced, and the IRS had not already raised the PFIC issue on audit. The IRS
found those conditions met and granted consent, along with a closing agreement.
This matters because reasonable reliance on a tax professional who missed a PFIC
can be a path to fix a blown QEF election deadline.

Ruling snapshot

• Question: May a shareholder who missed the QEF election deadline because its advisor failed to identify the foreign company as a PFIC make a retroactive QEF election?
• Outcome: approved (consent to retroactive election granted; closing agreement approved)
• Key authorities: IRC § 1295(b); Treas. Reg. § 1.1295-3(f)

Full text (IRS public release)

 Internal Revenue Service                                   Department of the Treasury
                                                            Washington, DC 20224

 Number: 202319001                                          Third Party Communication: None
 Release Date: 5/12/2023                                    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-101030-21
                                                            Date:
                                                            February 13, 2023


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

Legend

Taxpayer = --------------------------------------------
Foreign Company = -----------------------------------------
Country = ---------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Tax Advisor 1 = -------------------------------------------------
Tax Advisor 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 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.
PLR-101030-21                               2

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 ruling, it is subject to verification on
examination.


FACTS

In Year 1, Taxpayer obtained an ownership interest in Foreign Company, a
company organized in Country. In the same year, Taxpayer engaged Tax Advisor
1 to advise on tax compliance matters, including the U.S. federal income tax
consequences of Taxpayer’s investment in Foreign Company, and to provide tax
compliance services, including the preparation of Taxpayer’s U.S. federal income
tax returns. Tax Advisor 1 prepared Taxpayer’s tax returns for Year 1 through
Year 2 (many years later). However, Tax Advisor 1 failed to identify that Foreign
Company was a passive foreign investment company (“PFIC”) beginning in Year

1. Tax Advisor 1 neither advised Taxpayer about making a QEF election nor
prepared a Form 8621 for Foreign Company. Taxpayer was first informed about
Foreign Company’s PFIC status in Year 3 when Tax Advisor 2 performed an
analysis of Taxpayer’s potential sale of Foreign Company stock.

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) with respect to Foreign Company for Year
1.
PLR-101030-21                              3

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-101030-21                                 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 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.

We have, consequently, approved a closing agreement with Taxpayer with respect
to those issues affecting Taxpayer’s tax liability on the basis set forth above.
Pursuant to our practice with respect to such agreements, the agreement contains
a stipulation to the effect that any change or modification of applicable statutes
enacted subsequent to the date of this agreement and made applicable to the
taxable period involved will render the agreement ineffective to the extent that it is
dependent upon such statutes.

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.

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
PLR-101030-21                                          5


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


cc:       -------------------------
--------------------------------------------------------