IRS permits a retroactive qualified electing fund election

Plain-English summary

A U.S. citizen indirectly held a less-than-10-percent interest in a foreign company that was a passive foreign investment company. The taxpayer's longtime attorney did not identify the company as a PFIC, and later accountants identified the status but did not properly advise the taxpayer about a qualified electing fund election or the possibility of retroactive relief. After receiving new advice, the taxpayer asked to make a QEF election retroactive to the first year of ownership. The taxpayer submitted the required affidavits, agreed to amend affected later returns, and represented that the IRS had not raised the company's PFIC status on audit. The IRS concluded that the requirements of Treas. Reg. § 1.1295-3(f) were met and consented to the retroactive election, provided the taxpayer followed the regulation's time-and-manner rules.

Ruling snapshot

• Question: Could the taxpayer make a QEF election retroactive to the first year of the investment in the foreign company?
• Outcome: approved (consent was granted subject to the filing rules in Treas. Reg. § 1.1295-3(g))
• Key authorities: IRC § 1295; Treas. Reg. § 1.1295-3(f), (g)

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224

 Number: 202038002                                           Third Party Communication: None
 Release Date: 9/18/2020                                     Date of Communication: Not Applicable
 Index Number: 1295.02-00, 1295.02-02
                                                             Person To Contact:
 --------------------------                                  --------------------, ID No. -----------------
 -------------------------------------                       Telephone Number:
 --------------------------------                            --------------------
                                                             Refer Reply To:
                                                             CC:INTL:B02
                                                             PLR-109174-19
                                                             Date:
                                                             June 22, 2020



                          TY: -------

Legend

Taxpayer = -----------------------------------------------------
Foreign Company = ----------------------------------
Foreign Country = -------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------
Attorney A = ------------------
Attorney B = ------------------
State = -------------------
Accountants = -------------------------------------------------------------------------------------------------
----------

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

This is in response to a letter dated April 10, 2019, and additional correspondence
dated March 9, 2020 and March 12, 2020, submitted on behalf of Taxpayer 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 investment in Foreign Company.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by penalties of perjury statements
executed by an appropriate party. While this office has not verified any of the material
PLR-109174-19                                  2

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

FACTS

Taxpayer, a U.S. citizen, indirectly owned through an investment fund an interest in
Foreign Company of less than 10 percent from Year 1 through Year 5. Foreign
Company is organized in Foreign Country. Foreign Company had losses in Year 1
through Year 5. In Year 5, the investment fund sold its shares of stock in Foreign
Company to an unrelated buyer at a gain, some of which was held in escrow until
Year 6.

Taxpayer’s federal income tax returns for Year 1 and Year 2 were prepared by
Attorney A. Attorney A is licensed to practice law by State, has more than twenty years
of experience, and specializes in reporting for U.S. expatriates and other U.S. persons
with assets, business activities, and investments abroad. Attorney A had also prepared
Taxpayer’s federal income tax returns for several years prior to Year 1 and knew about
Taxpayer’s investment in Foreign Company. Attorney A did not identify Foreign
Company as a PFIC.

Taxpayer engaged Accountants to prepare Taxpayer’s federal income tax returns for
Year 3. When Accountants prepared Taxpayer’s federal income tax returns,
Accountants determined that Foreign Company was a PFIC; however, they failed to
properly advise Taxpayer of the consequences of making, or failing to make, a QEF
election, including the possibility of a retroactive QEF election. Taxpayer learned about
the possibility of making a retroactive QEF election for Foreign Company when he
received advice from Attorney B in Year 5.

Taxpayer submitted affidavits, under penalties of perjury, describing the events that led
to the failure to make the QEF election by the election due date. Taxpayer has agreed
to file amended returns for each of the subsequent taxable years affected by the
retroactive election, if any. Taxpayer represents that, as of the date of the request for
ruling, the PFIC status of Foreign Company had 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 QEF election under
Treas. Reg. § 1.1295-3(f) for Foreign Company 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
PLR-109174-19                                 3

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.

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 QEF election for Foreign
Company 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 election.
PLR-109174-19                                            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.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

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,


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




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