A company may make retroactive QEF elections after its tax adviser missed PFIC status

Plain-English summary

A diversified investment management company held interests in four foreign funds that were passive foreign investment companies. The company hired an accounting firm for federal tax advice and return preparation, provided the relevant financial information, and relied on the firm's tax professionals. The accounting firm failed to identify the funds as PFICs or advise the company about qualified electing fund elections, so the company missed the election deadlines. The company supplied sworn affidavits, agreed to amend affected later returns, and represented that the IRS had not raised the funds' PFIC status on audit. The IRS concluded that the requirements of Treas. Reg. § 1.1295-3(f) were met and consented to retroactive QEF elections for all four funds, provided the company follows the regulation's time-and-manner rules.

Ruling snapshot

• Question: May the company make retroactive QEF elections for four PFIC investments after reasonably relying on a tax adviser that failed to identify their PFIC status?
• Outcome: approved (retroactive elections are allowed if the company complies with Treas. Reg. § 1.1295-3(g))
• 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: 202023005                                              [Third Party Communication:
 Release Date: 6/5/2020                                         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-128781-16
                                                                Date:
                                                                February 21, 2020




                  TYs: --------------------------------------

Legend
Taxpayer                   =         --------------------------------------------------------------------------------
                           ------------------------------------------------------------------------------------------
                           ------------------
------------------------------------------------------------
----------------------------------------------------------
FC1                        =        ---------------------------------------------------------------------------------
FC2                        =        ---------------------------------------------------------------------------------
FC3                        =        --------------------------------
FC4                        =        -------------------------------
Date 1                     =        -------------
Date 2                     =        -----------
Date 3                     =        --------------
Year 1                     =        -------
Year 2                     =        -------
Year 3                     =        -------
Year 4                     =        -------

Accounting 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 investments in FC1, FC2, FC3, and FC4 for
(collectively referred to as “FCs”).

PLR-128781-16                                 2


      The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. This office has not verified any of the material submitted in
support of the request for a ruling. Verification of the factual information,
representations, and other data submitted may be required as part of the audit process.

FACTS

       Taxpayer is a diversified investment management company. For the years at
issue, Taxpayer invested in the following funds:

          •   FC1 on Date 1, Year 1,
          •   FC2 on Date 1, Year 2,
          •   FC3 on Date 2, Year 3, and
          •   FC4 on Date 3, Year 4.

      FCs were passive foreign investment companies (“PFICs”) as defined in section
1297(a).

       For the taxable years at issue, Taxpayer contracted with Accounting Firm, to
advise it on tax matters, including the U.S. federal income tax consequences of
Taxpayer’s investment in FCs. For the taxable years at issue, Taxpayer also engaged
Accounting Firm to provide tax compliance services, including the preparation of the
consolidated U.S. income tax returns of the consolidated group, of which Taxpayer was
a member. Taxpayer retained Accounting Firm’s services on the basis that it employs
tax professionals who are competent to render tax advice on U.S. federal income tax
matters, including the tax consequences of a U.S. person owing stock in a foreign
corporation. Further, Taxpayer made available to Accounting Firm the financial
statements with respect to the FCs, as well as all other relevant information.

       For the taxable years at issue, Accounting Firm failed to identify FCs as PFICs
and failed to advise Taxpayer of the consequences of making or failing to make QEF
elections with respect to FCs.

       Taxpayer submitted affidavits, 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 interest in FCs.

       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-128781-16                                 3


RULING REQUESTED

      Taxpayer requests the consent of the Commissioner to make QEF elections
under Treas. Reg. §1.1295-3(f) for FC1 for Year 1, FC2 for Year 2, FC3 for Year 3, and
FC4 for Year 4.

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-128781-16                                 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 FC1 retroactive
to Year 1, FC2 retroactive to Year 2, FC3 retroactive to Year 3, and FC4 retroactive to
Year 4, 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.


                                        Sincerely,



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




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