Taxpayer may make retroactive QEF elections for seven PFICs

Plain-English summary

A foreign citizen working in the United States became a U.S. person while owning direct or indirect interests in seven passive foreign investment companies. The taxpayer disclosed the interests to an enrolled agent, but the agent and accounting firm incorrectly advised that the holdings had no U.S. federal tax consequences and did not identify the companies as PFICs or discuss qualified electing fund elections. A later law firm discovered the issue, and the taxpayer promptly sought relief before the IRS raised it on audit. Based on the taxpayer's reliance on a qualified tax professional, sworn submissions, and other representations, the IRS consented to QEF elections retroactive to the taxpayer's first relevant year, provided the time-and-manner rules were followed.

Ruling snapshot

• Question: May the taxpayer make retroactive qualified electing fund elections for seven PFICs after relying on incorrect professional advice?
• Outcome: Approved, subject to Treas. Reg. § 1.1295-3(g).
• Key authorities: IRC §§ 1295 and 1297; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201808012 [Third Party Communication:
Release Date: 2/23/2018 Date of Communication: Month DD, YYYY]
Index Number: 1295.02-02
Person To Contact:
------------------------------------------- ----------------, ID No. ----------------
-------------------------------------- Telephone Number:
---------------------------- --------------------
Refer Reply To:
CC:INTL:B02
PLR-133664-16

                                                           Date:
                                                           November 21, 2017



              TY: ------

Legend

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

Country X = ------

FC1 = -------------------------------------------
FC2 = ---------------------------------------------------
FC3 = --------------
FC4 = -------------------
FC5 = ------------------
FC6 = --------------------
FC7 = ------------

Year 1 = ------
Year 2 = ------

A = ------
B = ---
C = ---
D = -------
E = ------
F = ------
G = ---

PLR-133664-16 2

Enrolled Agent = -----------
Accounting Firm = --------------------------------------
Law Firm = -----------------------

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 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 Taxpayer’s ownership interests (direct or indirect) of FC1,
FC2, FC3, FC4, FC5, FC6, and FC7 (collectively referred to as “FCs”) for Year 1.

  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 Country X citizen who is currently working and residing in the

United States under an H1-B visa. In Year 1, Taxpayer became a U.S. person (as
defined in section 7701(a)(30)) of the Code, for U.S. federal income tax purposes. At
such time, Taxpayer held direct or indirect ownership interests in

             FC1 (A% direct ownership)
             FC2 (B% direct ownership)
             FC3 (C% indirect ownership)
             FC4 (D% indirect ownership)
             FC5 (E% indirect ownership)
             FC6 (F% indirect ownership) and
             FC7 (G% direct ownership).

At all relevant times, each FC was a passive foreign investment company (“PFIC”) as
defined in section 1297(a) of the Code.

   Because Taxpayer was not familiar with U.S. income tax matters, Taxpayer

engaged the services of Enrolled Agent (as described in U.S. Department of Treasury
Circular No. 230) of Accounting Firm to advise him on his personal U.S. federal income
tax matters, including preparing his U.S. income tax returns and reporting obligations for
the years at issue. Enrolled Agent was an experienced professional in preparing U.S.
income tax returns and Accounting Firm is a tax-return preparation company with

PLR-133664-16 3

considerable experience in tax preparation for individuals. Taxpayer provided Enrolled
Agent with all access to his financial records and other relevant facts and circumstances
relating to the preparation of Taxpayer’s U.S. income tax returns, including his
ownership interests in FCs. However, Enrolled Agent and Accounting Firm erroneously
advised Taxpayer that there were no U.S. federal income tax consequences with
respect to his ownership interests in FCs. Both were not aware that FCs were PFICs
and, thus, did not advise Taxpayer of the consequences of making or failing to make
QEF elections with respect to FCs. In Year 2, Taxpayer engaged Law Firm in
connection with certain U.S. tax matters. Law Firm became aware of Taxpayer’s
ownership interests in FCs and advised Taxpayer of their PFIC status. Shortly
thereafter, Taxpayer took corrective action by requesting this ruling.

   Taxpayer submitted an affidavit, under penalties of perjury, describing the events

that led to the failure to make the QEF elections by the election due date. 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 his interest in directly or indirectly owned FCs.

  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 QEF elections

under Treas. Reg. §1.1295-3(f) with respect to FC1, FC2, FC3, FC4, FC5, FC6, and
FC7 for 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.

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:

PLR-133664-16 4

   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 QEF elections retroactive to Year
1 for FC1, FC2, FC3, FC4, FC5, FC6, and FC7, 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.

   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 private letter ruling is directed only to the taxpayer requesting it. Section

6110(k)(3) provides that it may not be used or cited as precedent.

    In accordance with the Power of Attorney on file with this office, a copy of this

letter ruling is being sent to your authorized representative.

PLR-133664-16 5

   A copy of this letter ruling must be attached to any federal 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,



                                    Kristine A. Crabtree
                                    Senior Technical Reviewer, Branch 2
                                    Office of Associate Chief Counsel (International)