Partnership receives retroactive QEF election for PFIC stock

Plain-English summary

A domestic partnership received stock in a foreign corporation that was a passive foreign investment company, or PFIC. Two successive tax professionals were unaware of the corporation's PFIC status and did not advise the partnership about a qualified electing fund election. The partnership entered a closing agreement and paid enough to eliminate prejudice to the government from years for which it and its partners could not amend returns. It also agreed to amend later affected returns, and the IRS had not raised the PFIC issue on audit before the ruling request. The IRS found the regulatory requirements satisfied and allowed the partnership to make the QEF election retroactive to the year it received the stock.

Ruling snapshot

• Question: Could the partnership make a retroactive qualified electing fund election for its PFIC stock?
• Outcome: Approved, subject to the timing and filing rules for the retroactive election.
• 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: 202128007 [Third Party Communication:
Release Date: 7/16/2021 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-131932-17
Date:
April 12, 2021

             TY: -------

Legend

Shareholder = ------------------------------------------------------------------------

                                        ------------------

Individual A = ----------------------------
------------------------
Entity B = ------------------------------------
----------------------

FC = -----------------------------------
Country X = ----------
X = --------------------------
Y = --------------------------
Z = ----

Year 1 = -------
Year 2 = -------
Year 3 = -------

Tax Professional 1 = -----------------------------
Accounting Firm 1 = -----------------------------------------
Tax Professional 2 = ------------------------------
Accounting Firm 2 = -------------------------------------------

PLR-131932-17 2

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

  This is in response to a letter submitted on Shareholder’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 Shareholder’s stock ownership in FC.

   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

   Shareholder is a domestic partnership for U.S. federal income tax purposes that

was formed in Year 1. Individual A owns an X interest, and Entity B owns the remaining
Y interest, in Shareholder. In Year 2, Individual A contributed Z shares of FC’s common
stock to Shareholder. FC, a Country X corporation, was at all relevant times a passive
foreign investment company (“PFIC”) as defined in section 1297(a) of the Code.

   Shareholder engaged the services of Tax Professional 1 with Accounting Firm 1

to advise it on its U.S. federal income tax matters. Shareholder made available to Tax
Professional 1 all information requested and relevant to the provision of tax advice and
the preparation of its U.S. income tax returns. In Year 3, upon Tax Professional 1’s
retirement, Shareholder engaged the services of Tax Professional 2 with Accounting
Firm 2 to advise it on its U.S. federal income tax matters and to prepare its U.S. income
tax returns. Similarly, Shareholder made available to Tax Professional 2 all information
requested and relevant to the provision of tax advice and the preparation of its U.S.
income tax returns.

    However, neither Tax Professional 1 nor Tax Professional 2 were aware that FC

was a PFIC and, thus, did not advise Shareholder of the consequences of making or
failing to make a QEF election with respect to FC.

  Shareholder submitted affidavits, under penalties of perjury, describing the

events that led to the failure to make the QEF election by the election due date.
Shareholder represents that, in all of the relevant years: (i) Tax Professionals 1 and 2
were competent to render tax advice with respect to ownership of shares of a foreign
corporation; (ii) FC was not identified as a PFIC; and (iii) Shareholder did not receive
any advice regarding the availability of a QEF election with respect to its interest in FC.

In accordance with a signed closing agreement between Shareholder and the

Commissioner, Shareholder has caused to be paid an amount sufficient to eliminate any

PLR-131932-17 3

prejudice to the U.S. government as a consequence of its and its partners’ inability to
file amended returns. Shareholder has agreed to file amended returns for each of the
subsequent taxable years affected by the retroactive election, if any.

   Shareholder represents that, as of the date of its request for ruling, the PFIC

status of FC had not been raised by the IRS on audit for any of the taxable years at
issue.

RULING REQUSTED

 Shareholder requests the consent of the Commissioner to make a retroactive

QEF election under Treas. Reg. §1.1295-3(f) with respect to FC for Year 2.

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:

PLR-131932-17 4

   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

Shareholder’s ruling request, we conclude that Shareholder has satisfied Treas. Reg.
§1.1295-3(f). Accordingly, consent is granted to Shareholder to make a QEF election
for FC retroactive to Year 2, provided that Shareholder complies with the rules under
Treas. Reg. §1.1295-3(g) regarding the time for, and manner of, making the retroactive
QEF election. We have, consequently, approved a closing agreement with Shareholder
with respect to those issues affecting the tax liability of its partners on the basis set forth
above.

   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,

                                   /s/ Kristine A. Crabtree

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

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