Retroactive qualified electing fund election approved

Plain-English summary

A partnership-owned shareholder invested in a foreign corporation that qualified as a passive foreign investment company. Its tax adviser did not identify the PFIC status or explain the qualified electing fund election until a later year. The shareholder submitted the required affidavits, and the IRS had not raised the issue on audit. The IRS granted consent to make the QEF election retroactive to the year the shares were acquired, subject to the regulation's filing requirements.

Ruling snapshot

• Question: May the shareholder make a retroactive qualified electing fund election for its PFIC investment?
• Outcome: approved
• Key authorities: IRC §§ 1295, 1297; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201651004 Third Party Communication: None
Release Date: 12/16/2016 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
------------------------------------------ -------------------------, ID No. -----------------
------------------------------------------ -----------------------------------------------------
----------------------------------- Telephone Number:
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Refer Reply To:
CC:INTL:B02
PLR-108300-16
Date:
September 14, 2016

Shareholder = --------------------------------------------------------------------
FC = -----------------------------------------------------
Country = -------------
Year 1 = -------
Year 2 = -------
Tax Advisor = ---------------------------
-
Dear ------------------:

This is in response to a letter dated March 9, 2016, submitted by Shareholder’s
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 Shareholder’s investment in FC.

The ruling contained in this letter is based upon information and representations
submitted by Shareholder 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

Shareholder is limited liability company that elected to be treated as a partnership for
U.S. federal income tax purposes for all relevant years. FC is an entity organized under
the laws of Country that is treated as a corporation for U.S. federal income tax
purposes. FC qualified as a passive foreign investment company (“PFIC”) as defined in
section 1297 with respect to Shareholder for all relevant years. Shareholder acquired
shares of FC in Year 1.

Shareholder relied on Tax Advisor to prepare its income tax returns for Year 1 through
Year 2, including the availability of making a QEF election. Tax Advisor did not inform
PLR-108300-16 2

Shareholder that FC was a PFIC or of the availability of making a QEF election until
Year 2.

Shareholder submitted affidavits, under penalties of perjury, describing the events that
led to its failure to make a QEF election with respect to FC by the election due date, the
discovery of such failure, the engagement and responsibilities of the qualified tax
professionals, and the extent to which the shareholder relied on such professionals.

Shareholder 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

Shareholder requests 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);
   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).

PLR-108300-16 3

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 Shareholder’s ruling
request, we conclude that Shareholder has satisfied Treas. Reg. § 1.1295-3(f).
Accordingly, consent is granted to Shareholder to make a retroactive QEF election with
respect to FC for Year 1, provided that Shareholder complies with the rules under
Treas. Reg. § 1.1295-3(g) regarding the time and manner for making the retroactive
QEF election.

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.

                                    Sincerely,


                                    Jeffery G. Mitchell
                                    Branch Chief, Branch 2
                                    (International)