Shareholder received consent for a retroactive QEF election

Plain-English summary

A United States shareholder owned less than 10 percent of a foreign corporation that became a passive foreign investment company. The shareholder's qualified tax adviser did not identify the PFIC status or explain the qualified electing fund election before its deadline. The shareholder paid an amount under a closing agreement to eliminate prejudice to the government and agreed to amend affected later-year returns. Because the regulatory requirements were satisfied and the issue had not been raised on audit, the IRS consented to a QEF election retroactive to the first PFIC year.

Ruling snapshot

• Question: Could the shareholder make a qualified electing fund election retroactive to the foreign corporation's first PFIC year?
• Outcome: approved
• Key authorities: IRC §§ 1295, 1297; Treas. Reg. § 1.1295-3

Full text (IRS public release)

 Internal Revenue Service                                        Department of the Treasury
                                                                 Washington, DC 20224

 Number: 202424001                                               Third Party Communication: None
 Release Date: 6/14/2024                                         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-101081-21
                                                                 Date:
                                                                 March 20, 2024




                 TY: -------


 Taxpayer             =     ----------------------------------------------------
 FC                   =     ----------------------
 Country X            =     ----------------
 Year 1               =     -----------------------------------------------------------------------------------
 Year 3               =     -------
 Year 4               =     -------
 Tax Advisor A        =     -------------------------------------------
 Tax Advisor B        =     -------------------------



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

This is in response to a letter and additional correspondence submitted on behalf of
Taxpayer 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 FC.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by penalties of perjury statements 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.
PLR-101081-21                                2



FACTS

Taxpayer, a US person, owned an interest of less than 10 percent in FC beginning in
Year 1. FC is organized in Country X. In Year 3, FC became a passive foreign investment
company (“PFIC”) as defined in section 1297(a) of the Code.

From Year 1 through Year 4, Taxpayer relied on Tax Advisor A for tax advice and tax
compliance assistance with respect to Taxpayer’s investment in FC. Tax Advisor A was
competent to render advice with respect to Taxpayer’s investment in FC. Late in Year 4,
after the extended due date for Taxpayer’s Year 3 federal income tax return, Tax Advisor
A informed Taxpayer of its belief that FC was a PFIC beginning in Year 3. Prior to this
time, Taxpayer did not know or have reason to know that FC was a PFIC. Several months
later, Tax Advisor A explained to Taxpayer the possibility of making a retroactive QEF
election for Year 3 with the consent of the Commissioner. Therefore, Tax Advisor A failed
to advise Taxpayer of FC’s PFIC status and the availability of a QEF election before the
due date to make a QEF election with respect to FC for Year 3. Taxpayer then engaged
Tax Advisor B to seek the consent of the Commissioner to make a retroactive QEF
election with respect to FC effective for Year 3.

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 paid an amount sufficient to eliminate any prejudice to the United States
government as a consequence of its inability to file amended returns, in accordance with
a signed closing agreement between Taxpayer and the Commissioner. Further,
Taxpayer has agreed to file an amended return for each of the subsequent taxable years
affected by the retroactive election, if any.

In addition, Taxpayer represents that, as of the date of their 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 3 under Treas. Reg. § 1.1295-3(f) with respect to their investment in FC.

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.
PLR-101081-21                                  3


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.
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 FC, retroactive to Year 3,
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. We have, consequently,
approved a closing agreement with Taxpayer with respect to those issues affecting its tax
liability for closed years 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
PLR-101081-21                                 4

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.

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, a copy of this letter is
being sent to your authorized representative.


                                            Sincerely,

                                            /s/ Kristine A. Crabtree

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




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