Retroactive QEF elections allowed for two PFICs

Plain-English summary

A taxpayer became a U.S. tax resident while owning interests in two foreign corporations that were passive foreign investment companies. The taxpayer relied on a certified public accountant who did not recognize their PFIC status and did not advise her about qualified electing fund elections. After another adviser discovered the issue, the taxpayer took corrective action, entered a closing agreement, paid enough to eliminate prejudice to the government, and agreed to amend affected returns. Because the taxpayer met the regulatory reliance, nonprejudice, timing, and procedural requirements, the IRS consented to retroactive QEF elections for both companies.

Ruling snapshot

• Question: Could the taxpayer make retroactive QEF elections for two PFIC investments after relying on an adviser who missed their PFIC status?
• Outcome: Yes; consent was granted subject to the required time, manner, and closing-agreement conditions.
• 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: 201925002                                              [Third Party Communication:
Release Date: 6/21/2019                                        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-102820-16
                                                               Date:
                                                               March 22, 2019

                  TY: -------


Legend

Taxpayer                   =        ---------------------
                                    ----- ------------------
X%                         =        ------
FC1                        =        ------------------------------
Y%                         =        -----------
FC2                        =        ------------------------------------
Year 1                     =        -------
Year 2                     =        -------
Country X                  =        ------------
Accountant A               =        ----------------------
Attorney B                 =        --------------------------



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 investments in FC1 and FC2 (collectively
referred to as “FCs”) for Year 1.

      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
PLR-102820-16                                  2

material submitted in support of the request for rulings, it is subject to verification on
examination.

FACTS

       Taxpayer is a citizen of Country X and became a resident for U.S. income tax
purposes in Year 1. Taxpayer owns X% of FC1 and Y% of FC2. FC1 and FC2 are
corporations organized under the laws of Country X. FC1 and FC2 were passive
foreign investment companies (“PFICs”) as defined in section 1297(a) since Year 1.

        During the relevant years, Taxpayer engaged the services of Accountant A, a
certified public accountant, to prepare her income tax returns as a U.S. resident.
Taxpayer considered Accountant A to be very competent and knowledgeable about
U.S. income tax matters, including rendering tax advice with respect to her ownership of
the stock in FCs. Taxpayer made available to Accountant A all information requested
and relevant to the provision of tax advice and the preparation of her income tax
returns. However, Accountant A was not aware 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 learned of a potential buyer for the assets owned
by FC1. Accountant A suggested that Taxpayer consult with Attorney B for advice on
any U.S. income tax issues pertaining to such a sale. Attorney B became aware of
Taxpayer’s ownership interest in FCs and their PFIC status. Attorney B took corrective
action that same year.

       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 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 her interest in FCs.

       Taxpayer has paid an amount sufficient to eliminate any prejudice to the U.S.
government as a consequence of her inability to file amended returns, in accordance
with a signed closing agreement between Taxpayer and the 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 the request for ruling, the PFIC status
of FCs had not been raised by the IRS on audit for any of the taxable years at issue.
PLR-102820-16                                3


RULING REQUESTED

      Taxpayer requests the consent of the Commissioner to make QEF elections
under Treas. Reg. §1.1295-3(f) for FCs 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 the 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:

       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.
PLR-102820-16                                 4

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 for FCs retroactive
to 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 elections. We have,
consequently, approved a closing agreement with Taxpayer with respect to those issues
affecting her 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.

      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.


                                        Sincerely,



                                        Kristine A. Crabtree
                                        Senior Technical Reviewer, Branch 2
                                        (International)



Attachment: Closing Agreement


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