Taxpayer may make a retroactive qualified electing fund election

Plain-English summary

A taxpayer asked for permission to make a qualified electing fund election retroactive to the year he first invested in a foreign corporation. Two tax professionals failed to identify the corporation as a passive foreign investment company or advise him about the election. The taxpayer supplied sworn affidavits, entered a closing agreement, paid an amount to eliminate prejudice from closed years, and agreed to amend open-year returns. The IRS also had not raised the corporation's PFIC status on audit. The IRS concluded that the taxpayer satisfied Treas. Reg. § 1.1295-3(f) and granted consent, provided he follows the regulation's time and manner requirements.

Ruling snapshot

• Question: May the taxpayer make a QEF election retroactive to the first year of his investment in the PFIC?
• Outcome: Approved
• Key authorities: IRC § 1295; Treas. Reg. §§ 1.1295-3(f) and 1.1295-3(g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202526012 Third Party Communication: None
Release Date: 6/27/2025 Date of Communication: Not Applicable
Index Number: 1295.00-00, 1295.02-00
Person To Contact:
----------------- ------------------, ID No. -----------------
----------------------------------------- Telephone Number:
------------------------------- ---------------------
Refer Reply To:
CC:INTL:B02
PLR-125205-21
Date:
March 31, 2025

             TY: -------

LEGEND

Taxpayer = --------------------------------------------
FC1 = -----------------
FC2 = ---------------------------------
Country X = -----------
Country Y = ----------------
Tax Professional 1 = -------------------
Tax Professional 2 = -------------------
Accounting Firm 1 = ---------------------------------------
Accounting Firm 2 = -----------------------------------
Accounting Firm 3 = ---------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------

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 FC1.

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
PLR-125205-21 2

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 invested in FC1, a Country X entity treated as a corporation for
U.S. federal income tax purposes. At all times, Taxpayer was a minority owner of FC1
and no other U.S. persons owned an interest in FC1.

For the years at issue, FC1 owned an interest in FC2, a Country Y entity treated as a
corporation for U.S. federal income tax purposes. FC1 had minimal activity outside of
managing its investment in FC2.

At all times relevant, Taxpayer has relied on tax professionals to prepare his federal
income tax returns and was not aware that an investment in a foreign company might
be treated differently than an investment in a U.S. company. In Year 1, when Taxpayer
first invested in FC1, Taxpayer employed Accounting Firm 1. Tax Professional 1 was
the accountant at Accounting Firm 1 who was primarily responsible for preparing
Taxpayer’s federal income tax returns. Tax Professional 1 was a certified public
accountant with more than 25 years of experience when he began advising Taxpayer.
In Year 3, Accounting Firm 1 merged with Accounting Firm 2 and Tax Professional 1
continued to serve Taxpayer in the same capacity as before until Year 4, when Tax
Professional 1 transitioned the Taxpayer’s account to Tax Professional 2. Tax
Professional 2 was a certified public accountant when she began advising Taxpayer.

Throughout the time that Tax Professional 1 had primary responsibility for preparing
Taxpayer’s federal income tax returns, Tax Professional 1 asked regularly about foreign
accounts but did not ask specifically whether Taxpayer had any investments in foreign
companies and did not ask Taxpayer to fill out an annual questionnaire about his
income or investments. Taxpayer believed Tax Professional 1’s question regarding
“foreign accounts” referred to bank accounts and other financial accounts. Taxpayer did
not otherwise know his ownership of FC1 was relevant for his U.S. federal income tax
reporting given that Taxpayer did not receive any income from this investment in Year 1.
In Year 2, Taxpayer communicated to Tax Professional 1 that Taxpayer received
income from FC1.

For the entire period that Tax Professional 1 had primary responsibility for preparing
Taxpayer’s federal income tax returns, Tax Professional 1 was not aware of the PFIC
rules and, therefore, Tax Professional 1 failed to identify FC1 as a PFIC. As a result,
Tax Professional 1 failed to advise Taxpayer of the availability of a QEF election and the
consequences of making or failing to make a QEF election with respect to his
investment in FC1.

When Tax Professional 2 took over Taxpayer’s tax return preparation responsibilities
from Tax Professional 1 in Year 4, she also failed to identify FC1 as a PFIC. In addition,
PLR-125205-21 3

Tax Professional 2 failed to advise Taxpayer of the availability of a QEF election and the
consequences of making or failing to make a QEF election with respect to his
investment in FC1. Taxpayer answered all questions related to his investments and
made information requested available to Tax Professional 2.

Taxpayer first learned about the existence of the PFIC rules in Year 5 when his son
consulted Accounting Firm 3 while performing research related to estate planning.
Accounting Firm 3 alerted Taxpayer’s son to the fact that FC1 was a PFIC and advised
that Taxpayer make a QEF election.

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

In addition, Taxpayer represents that, as of the date of this request for ruling, the PFIC
status of FC1 has 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 under Treas. Reg. § 1.1295-3(f) with respect to his investment in FC1.

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.

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:
PLR-125205-21 4

   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 FC1 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. We have approved a closing agreement with Taxpayer with respect to those
issues affecting his 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
PLR-125205-21 5

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/ Melinda E. Harvey

                                               Melinda E. Harvey
                                               Branch Chief, Branch 2
                                               Associate Chief Counsel (International)

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