IRS permits retroactive QEF elections for two foreign investments

Plain-English summary

A U.S. taxpayer invested in two foreign corporations, partly through a foreign grantor trust, but her tax professional failed to identify the companies as passive foreign investment companies or advise her about qualified electing fund elections. She later sold the shares and learned of the missed elections when a new associate at the tax professional prepared her return. The taxpayer asked to make retroactive QEF elections under IRC § 1295 and Treas. Reg. § 1.1295-3(f). She submitted sworn affidavits, made the request before the IRS raised the PFIC issue on audit, entered a closing agreement, and paid an amount intended to eliminate prejudice to the government for closed years. The IRS concluded that the regulatory requirements were met and consented to retroactive elections for each company, provided she follows the prescribed time and manner rules. Without the relief, the disposition gains had been treated under the less favorable § 1291 excess-distribution regime.

Ruling snapshot

• Question: May the taxpayer make retroactive QEF elections for two PFIC investments after relying on a tax professional who missed the elections?
• Outcome: Approved, subject to compliance with Treas. Reg. § 1.1295-3(g).
• Key authorities: IRC §§ 1291, 1295; Treas. Reg. § 1.1295-3(f), (g).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202550006 Third Party Communication: None
Release Date: 12/12/2025 Date of Communication: Not Applicable
Index Number: 1295.00-00, 1295.02-02
Person To Contact:
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Refer Reply To:
CC:INTL:B02
PLR-108562-24
PLR-108574-24
Date:
September 16, 2025

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

Legend

Taxpayer = --------------------------------------------------
FC1 = -------------------------------------------
FC2 = ----------------------------------------------------------------
Country X = ----------
Tax Professional = -----------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------

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 retroactive qualified electing fund (“QEF”) elections
under section 1295(b) of the Internal Revenue Code (the “Code”) and Treas. Reg.
§ 1.1295-3(f) with respect to Taxpayer’s investments in FC1 and FC2.

The rulings contained in this letter are 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 rulings, it is subject to verification on examination.

FACTS

Taxpayer is a United States person who is the owner, trustee, and beneficiary of a trust
organized in Country X and treated as a foreign grantor trust under sections 671
PLR-108562-24 2

through 679. In Year 1, through Taxpayer’s Country X trust, Taxpayer invested in FC1,
a Country X entity treated as a corporation for U.S. federal income tax purposes. No
QEF election was made with respect to FC1 in Year 1. In Year 2, Taxpayer directly
invested in FC1. In Year 2, through Taxpayer’s Country X trust, Taxpayer invested in
FC2, a Country X entity treated as a corporation for U.S. federal income tax purposes.
No QEF election was made with respect to FC2 in Year 2. In Year 3, Taxpayer
disposed of all her shares, including her shares held indirectly through Taxpayer’s
Country X trust, in FC1 and FC2 and realized gains.

For all tax years relevant to these rulings, Taxpayer relied on Tax Professional to
prepare her U.S. federal income tax returns. Tax Professional failed to identify each of
FC1 and FC2 as a passive foreign investment company (“PFIC”). As a result, Tax
Professional failed to advise Taxpayer of the availability of a QEF election and the
consequences of making or failing to make QEF elections with respect to her
investments in FC1 and FC2. Tax Professional has no record of having received PFIC
Annual Information Statements with respect to FC1 and FC2 for the years that Taxpayer
would have made QEF elections.

Taxpayer first learned about the existence of the PFIC rules in Year 4 when a new
associate at Tax Professional prepared Taxpayer’s Year 3 U.S. federal income tax
returns. The associate noticed that timely QEF elections had not been made with
respect to FC1 and FC2. Tax Professional then alerted Taxpayer that Taxpayer’s
investments in FC1 and FC2 may be subject to the PFIC rules. Prior to Year 4,
Taxpayer did not know that FC1 and FC2 may be PFICs and of the availability of a QEF
election and related tax consequences. Because timely QEF elections had not been
made with respect to FC1 and FC2, Tax Professional treated FC1 and FC2 as PFICs
subject to section 1291, resulting in excess distributions from gains recognized on the
disposition of shares in FC1 and FC2 in Year 3. Tax Professional then advised
Taxpayer to make retroactive QEF elections with respect to FC1 and FC2 to prevent her
investments in FC1 and FC2 from being treated as section 1291 funds.

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 her inability to file amended returns for
the closed taxable years. Further, Taxpayer has agreed to file an amended return for
each of the open taxable years affected by the retroactive elections, if any.

Taxpayer submitted affidavits, under penalties of perjury, describing the events that led
to the failure to make the QEF elections by the election due date. In addition, Taxpayer
represents that, as of the date of this request for rulings, the PFIC status of FC1 and
FC2 has not been raised by the Internal Revenue Service on audit for any of the taxable
years at issue.
PLR-108562-24 3

RULINGS REQUESTED

Taxpayer requests the consent of the Commissioner to make retroactive QEF elections
under Treas. Reg. § 1.1295-3(f) with respect to her investments in FC1 for Year 1 and
FC2 for Year 2.

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 a timely election 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 tax professional.

Treas. Reg. § 1.1295-3(f)(4)(ii) and (iii).
PLR-108562-24 4

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 retroactive QEF elections with
respect to FC1 for Year 1 and FC2 for Year 2 provided that Taxpayer complies with the
rules under Treas. Reg. § 1.1295-3(g) regarding the time and manner for making the
retroactive QEF elections. We have approved a closing agreement with Taxpayer with
respect to those issues affecting her 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.

These rulings are 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 rulings.

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 Counsel, Branch 2
                                            Associate Chief Counsel (International)

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