Consent to make a retroactive QEF election for a PFIC investment

Plain-English summary

A married couple who file a joint U.S. return owned a small stake (under 10 percent) in a foreign corporation. That company later became a "passive foreign investment company" (PFIC), a status that subjects U.S. investors to a harsh default tax regime unless they elect to treat the company as a "qualified electing fund" (QEF). The couple's tax advisor did not tell them the company was a PFIC, or that a QEF election was available, until after the election deadline had passed. They hired a second advisor to ask the IRS for permission to make the election late. Under Treas. Reg. § 1.1295-3(f), the IRS can consent to a retroactive QEF election if the taxpayer reasonably relied on a qualified professional, granting relief will not prejudice the government, the request comes before the IRS raises the company's PFIC status on audit, and the procedural requirements are met. Finding those conditions satisfied, and after the couple signed a closing agreement and paid an amount to remove any prejudice, the IRS consented to a QEF election retroactive to the year the company became a PFIC.

Ruling snapshot

• Question: May taxpayers who missed the deadline because their advisor did not flag the company's PFIC status make a retroactive QEF election with the Commissioner's consent?
• Outcome: approved (consent granted, with a closing agreement)
• Key authorities: IRC §§ 1295(b), 1297(a); Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202438001 Third Party Communication: None
Release Date: 9/20/2024 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-101083-21
Date:
June 25, 2024

LEGEND
TY: -------

Taxpayers = --------------------------------------------------

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
Taxpayers 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 Taxpayers' investment in FC.

The ruling contained in this letter is based upon information and representations
submitted by the Taxpayers 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.

FACTS

Taxpayers, U.S. persons who file a joint U.S. Federal income tax return, 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, Taxpayers relied on Tax Advisor A for tax advice and tax
compliance assistance with respect to Taxpayers' investment in FC. Tax Advisor A was
competent to render advice with respect to Taxpayers' investment in FC. Late in Year
4, after the extended due date for Taxpayers' Year 3 federal income tax return, Tax
Advisor A informed Taxpayers of its belief that FC was a PFIC beginning in Year 3.
Prior to this time, Taxpayers did not know or have reason to know that FC was a PFIC.
Several months later, Tax Advisor A explained to Taxpayers the possibility of making a
retroactive QEF election for Year 3 with the consent of the Commissioner. Therefore,
Tax Advisor A failed to advise Taxpayers 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.
Taxpayers 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.

Taxpayers submitted affidavits, under penalties of perjury, describing the events that led
to the failure to make the QEF election by the election due date.

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

In addition, Taxpayers represent 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

Taxpayers request 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.

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 Taxpayers' ruling
request, we conclude that Taxpayers have satisfied Treas. Reg. § 1.1295-3(f).
Accordingly, consent is granted to Taxpayers to make a QEF election for FC, retroactive
to Year 3, provided that Taxpayers comply 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 Taxpayers 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 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)

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

  -----------------
  ------------------------
  ----------------------
  -------------