Taxpayer granted retroactive QEF treatment for PFIC shares

Plain-English summary

A U.S. taxpayer received shares of a foreign corporation that qualified as a passive foreign investment company. Three accountants prepared returns over several years but did not identify the PFIC status or explain the qualified electing fund election. The most recent accountant discovered the issue after attending professional education on the PFIC rules. The taxpayer then supplied affidavits, entered a closing agreement, paid enough to avoid prejudice to the government, and sought relief before the IRS raised the issue on audit. The IRS found the regulatory requirements satisfied and allowed a QEF election retroactive to the first year the taxpayer received shares.

Ruling snapshot

• Question: Could the taxpayer make a retroactive qualified electing fund election for the foreign corporation?
• Outcome: Approved
• Key authorities: IRC §§ 1295 and 1297; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service                                Department of the Treasury
                                                        Washington, DC 20224

Number: 201622029                                       Third Party Communication: None
Release Date: 5/27/2016                                 Date of Communication: Not Applicable
Index Number: 1295.02-02
                                                        Person To Contact:
----------------------                                  ------------------------, ID No. ----------------
-------------------------------                         Telephone Number:
------------------------------                          --------------------
                                                        Refer Reply To:
                                                        CC:INTL:B02
                                                        PLR-142061-14
                                                        Date:
                                                        February 12, 2016


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

LEGEND

Taxpayer = ------------------------------------------

FC = --------------------------------

Country = ---------------------------

Accountant A = ---------------------
Accountant B = -------------
Accountant C = ----------------

Firm = -----------------------------

Year 1 = ------
Year 2 = ------
Year 3 = ------
Year 4 = ------
Year 5 = ------
Year 6 = ------
Year 7 = ------
Year 8 = ------

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

This is in response to a letter dated October 31, 2014, submitted by your authorized
representative that requested the consent of the Commissioner of the Internal Revenue
Service (“Commissioner”) for Taxpayer to make a retroactive qualified electing fund
PLR-142061-14                                2

(“QEF”) election under section 1295(b) of the Internal Revenue 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 on behalf of Taxpayer by his authorized representative, 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 this request for ruling, such
material is subject to verification on examination. The information submitted in the
request is substantially as set forth below.

FACTS

Taxpayer is a U.S. citizen. In Year 1 and Year 4, Taxpayer received shares of FC as
gifts. FC is an entity organized under the laws of Country that is treated as a
corporation for federal tax purposes.

For tax years Year 1 through Year 2, Accountant A, a competent U.S. accountant, was
engaged to prepare Taxpayer’s tax returns, including with respect to Taxpayer’s
ownership in FC. Accountant A was provided all relevant and available information
regarding FC, including annual financial statements and year end reporting information.
Accountant A did not advise that FC was a passive foreign investment company
(“PFIC”) within the meaning of section 1297(a). Accountant A failed to advise of the
possibility of making a QEF election under section 1295(b) with respect to FC and of the
consequences of making, or failing to make, such an election.

For tax years Year 3 through Year 5, Accountant B, a competent U.S. accountant, was
engaged to prepare Taxpayer’s federal income tax returns and provide advice on
Taxpayers’ U.S. tax matters. Accountant B was provided all relevant and available
information regarding FC. Accountant B was aware that FC is a corporation organized
under the laws of Country; however, Accountant B did not advise that FC was a PFIC
within the meaning of section 1297(a) and failed to advise of the possibility of making a
QEF election under section 1295(b) with respect to FC and of the consequences of
making, or failing to make, such an election.

For tax years Year 6 to the present, Accountant C, a competent U.S. accountant, was
engaged to prepare Taxpayer’s federal income tax returns and provide advice on
Taxpayer’s U.S. tax matters. Accountant C took over the responsibilities of Taxpayer’s
tax matters after Accountant B left Firm, a certified public accounting practice, where
both Accountant B and Accountant C were shareholders. As with Accountant B,
Accountant C was provided with all relevant and available information regarding FC.
Accountant C was aware that FC is a corporation organized under the laws of Country;
however, for tax years Year 6 through Year 7, Accountant C did not advise that FC was
a PFIC within the meaning of section 1297(a) and failed to advise of the possibility of
PLR-142061-14                                3

making a QEF election under section 1295(b) with respect to FC and of the
consequences of making, or failing to make, such an election.

In Year 8, Accountant C attended a Continuing Professional Education seminar focused
on PFIC rules. This presentation alerted Accountant C that it was necessary to
determine whether FC met the definition of a PFIC within the meaning of section
1297(a). Accountant C thus reviewed the Taxpayer’s files and ultimately advised
Taxpayer that FC was a PFIC for all years that Taxpayer held shares in FC. Taxpayer
decided to seek relief to make a retroactive QEF election.

Taxpayer has submitted affidavits, under penalties of perjury, that describe the events
that led to Taxpayer’s failure to make a QEF election with respect to FC by the due date
of his return for the Year 1 tax year. Affidavits have also been submitted by Accountant
A, Accountant B, and Accountant C describing their engagement and responsibilities as
well as the advice concerning the tax treatment of FC that each provided.

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, 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.

Taxpayer represents that, as of the date of his 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 with
respect to FC under Treas. Reg. §1.1295-3(f), retroactive to Year 1.

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.
PLR-142061-14                                4

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 retroactive QEF election with
respect to FC 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, consequently, approved a closing agreement with Taxpayer with
respect to those issues affecting his 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.
PLR-142061-14                                 5

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, copies of this letter
ruling are being sent to your authorized representatives.


                                       Sincerely,



                                       Kristine A. Crabtree
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel (International)




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