Investors may make a retroactive qualified electing fund election

Plain-English summary

A married couple acquired shares in a passive foreign investment company and relied on their tax accountant to prepare their joint return. Although the accountant knew about the investment, the accountant did not tell them that the company was a PFIC or that they could make a qualified electing fund election. The couple discovered the issue through their own research before the IRS raised it on audit. The IRS found that they met the regulatory requirements and allowed them to make the QEF election retroactively to the year they acquired the shares, provided they followed the prescribed filing rules.

Ruling snapshot

• Question: May the investors make a late QEF election for their PFIC shares after relying on a tax professional who did not identify the issue?
• Outcome: Approved, subject to the time-and-manner rules for the retroactive election
• Key authorities: IRC § 1295; Treas. Reg. § 1.1295-3(f) and (g)

Full text (IRS public release)

Internal Revenue Service                                  Department of the Treasury
                                                          Washington, DC 20224

Number: 201629005                                         Third Party Communication: None
Release Date: 7/15/2016                                   Date of Communication: Not Applicable
Index Number: 1295.02-02
                                                          Person To Contact:
-----------------------------------------                 ------------------------, ID No. ------------------
---------------------------                               ----------------------------------------------------
------------------                                        Telephone Number:
--------------------------                                ----------------------
                                                          Refer Reply To:
                                                          CC:INTL:B02
                                                          PLR-135814-15
                                                          Date:
                                                          April 15, 2016


Legend

Taxpayers = -------------------------------------- and -------------------------------------
FC = ------------------------------
Country A = ------------
Year 1 = -------
Year 2 = -------
Tax Accountant = ---------------------------




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


This is in response to a letter dated October 28, 2015, submitted by Taxpayers’
authorized representatives that requested 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 Taxpayers 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

Taxpayers are U.S. citizens who file a joint return. On various dates in Year 1,
Taxpayers acquired shares of FC. FC was a passive foreign investment company
PLR-135814-15                                2

(“PFIC”) with respect to Taxpayers and continues to be a PFIC with respect to
Taxpayers.

Taxpayers relied on Tax Accountant to prepare their income tax return for Year 1.
Although Tax Accountant was aware of Taxpayers’ acquisition of FC shares, Tax
Accountant did not inform them that FC was a PFIC or that a QEF election was
available. In Year 2, Taxpayers became aware of the PFIC issue with respect to their
FC shares after conducting their own research and confirming the issue with FC and the
Taxpayers’ new tax accountant.

Taxpayers submitted affidavits, under penalties of perjury, describing the events that led
to their failure to make a QEF election with respect to FC by the election due date,
including the role of Tax Accountant.

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 retroactive 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
taxpayer if (1) an election by the taxpayer under section 1295(b) applies to such PFIC
for the taxable year; and (2) the PFIC complies with such requirements as the Secretary
may prescribe for purposes of determining the ordinary earnings and net capital gains of
such company.

Under section 1295(b)(2), a QEF election may be made for any taxable year at any time
on or before the due date (determined with regard to extensions) for filing the return for
such taxable year. To the extent provided in regulations, such an election may be made
after such due date if the taxpayer failed to make an election by the due date because
the taxpayer 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);
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       3. the request is made before a representative of the Internal Revenue Service
          raises upon audit the PFIC status of the corporation 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 such failure;
       3. the engagement and responsibilities of the qualified tax professional; and
       4. the extent to which the shareholder relied on such 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 retroactive QEF election with
respect to FC for Year 1, 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.

This ruling is directed only to the Taxpayers requesting it. Section 6110(k)(3) of the
Code provides that it may not be used or cited as precedent. 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.

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.
PLR-135814-15                                  4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.




                                       Sincerely,



                                       Kristine Crabtree
                                       Assistant to Branch Chief, Branch 2
                                       (International)