Retroactive QEF elections granted for two PFIC investments

Plain-English summary

A partnership invested in two passive foreign investment companies and relied on a qualified accounting firm for international tax advice and return preparation. The firm failed to identify the companies as PFICs or advise the partnership about qualified electing fund elections and the consequences of not making them. The partnership later discovered the problem, submitted the required affidavits, entered a closing agreement, and paid enough to eliminate prejudice to the government from years it could no longer amend. It also represented that the IRS had not raised the companies' PFIC status on audit. The IRS found that the regulatory requirements were satisfied and consented to retroactive QEF elections for the two specified years, provided the partnership followed the prescribed filing rules.

Ruling snapshot

• Question: May the partnership make retroactive QEF elections for two PFIC investments after its tax adviser failed to identify them as PFICs?
• Outcome: approved
• Key authorities: IRC §§ 1295, 1297(a); Treas. Reg. §§ 1.1295-3(f), 1.1295-3(g)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201739006                                              Third Party Communication: None
Release Date: 9/29/2017                                        Date of Communication: Not Applicable
Index Number: 1295.02-02
                                                               Person To Contact:
------------------------                                       ------------------, ID No. --------------------
--------------------------------                               Telephone Number:
-------------------------------------                          ----------------------
----------------------------------------------                 Refer Reply To:
------------------------------                                 CC:INTL:B02
                                                               PLR-107499-16
                                                               Date:
                                                               June 30, 2017


                  TY: -------

Legend

TP                         =        -------------------------------------
                                    EIN -----------------
FC1                        =        ----------------------------------------------------
                                    EIN -----------------
Year 1                     =        -------
FC2                        =        ------------------------------------------
                                    EIN -----------------
Year 2                     =        -------
Accounting Firm            =        ------------------------------------------


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

       This is in response to your letter received by our office on March 7, 2016,
requesting the consent of the Commissioner of the Internal Revenue Service to make a
retroactive qualified electing fund (“QEF”) election under section 1295(b) of the Internal
Revenue Code (“Code”) and Treas. Reg. §1.1295-3(f) with respect to your investments
in FC1 and FC2 (collectively referred to as “FCs”).

      The rulings contained in this letter are based upon information and
representations submitted by the 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
PLR-107499-16                               2

        Taxpayer is a partnership comprised of tax-exempt partners with the exception of
one non-tax-exempt partner since its formation. Taxpayer invested in FC1 in Year 2
and FC2 in Year 2. FCs were passive foreign investment companies (“PFICs”) as
defined under section 1297(a) of the Code. During the relevant years, Taxpayer
retained Accounting Firm to provide advice on tax matters, including federal income tax
treatment of the Taxpayer’s investments in FCs, and to prepare Taxpayer’s federal
income tax returns. Accounting Firm employed qualified tax professionals that were
competent to render international tax advice, including the consequences of a U.S.
person owning stock of a foreign corporation. Taxpayer made available to Accounting
Firm any information requested that was relevant to the provision of tax advice and the
preparation of Taxpayer’s income tax returns. The qualified tax professionals of
Accounting Firm were competent to render U.S. tax advice with respect to stock
ownership of a foreign corporation. Taxpayer relied on the advice of Accounting Firm to
comply with U.S. tax laws. However, Accounting Firm failed to identify FCs as PFICs
within the meaning of section 1297(a). Consequently, Accounting Firm failed to advise
Taxpayer of the possibility of making a QEF election under section 1295(b) with respect
to FCs and of the consequences of making, or failing to make, such an election.
Taxpayer recently became aware of FCs’ status as PFICs.

       Taxpayers submitted affidavits, signed under penalties of perjury, describing the
events that led to the failure to make the QEF elections by the election due dates.
Taxpayer represents that, in all of the relevant years: (i) FCs were not identified as
PFICs; and (ii) Taxpayer did not receive any advice regarding the availability of QEF
elections with respect to its investments in FCs.

       Taxpayer has paid an amount sufficient to eliminate any prejudice to the U.S.
government as a consequence of its inability to file amended returns, in accordance
with a signed closing agreement between Taxpayer and Commissioner. Taxpayer has
agreed to file amended returns for each of the subsequent taxable years affected by the
retroactive elections, if any.

      Taxpayer represents that as of the date of this request for ruling, the PFIC status
of FCs 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 retroactive QEF
election with respect to FC1 for Year 1 and FC2 for Year 2 under Treas. Reg. §1.1295-
3(f).

LAW

       Section 1295(a) of the Code provides that any PFIC shall be treated as a QEF
with respect to a taxpayer if (1) an election by the taxpayer under section 1295(b)
PLR-107499-16                                 3

applies to such company for the taxable year and (2) the company 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 taxpayer 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).

       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 which 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 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 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 election.
PLR-107499-16                                 4


       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 ruling must be attached to any tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement
attaching a statement to their return that provided the date and control number of the
letter ruling.

                                       Sincerely,



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




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