Retroactive QEF election allowed for a PFIC after the preparer missed it

Plain-English summary

A U.S. investor who owns shares in a passive foreign investment company (PFIC) faces harsh default tax rules unless the investor elects to treat the company as a "qualified electing fund" (QEF), which normally must be done by the tax-return due date for the first year the shares are held. Here the taxpayer's return preparer never flagged that the foreign company was a PFIC or that a QEF election was available, so the election was missed, and the taxpayer only learned of the problem in a later year, after already selling the investment. The taxpayer asked for the Commissioner's consent to make the QEF election retroactively under Treas. Reg. § 1.1295-3(f). The IRS granted consent, finding the taxpayer reasonably relied on a qualified tax professional, made the request before any IRS audit raised the PFIC issue, and met the procedural affidavit requirements. A retroactive election is allowed even though the taxpayer no longer owns the PFIC. The taxpayer must still follow the time-and-manner rules of Treas. Reg. § 1.1295-3(g) to actually make the election.

Ruling snapshot

• Question: May a taxpayer get the Commissioner's consent to make a retroactive QEF election for a PFIC the preparer failed to flag, after the shares were sold?
• Outcome: Approved (consent to a retroactive QEF election for Year 1 granted)
• Key authorities: IRC § 1295(b); Treas. Reg. § 1.1295-3(f), (g); IRC § 1297(a)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202201011 Third Party Communication: None
Release Date: 1/7/2022 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
--------------------- ---------------------------, ID No. --------------
-------------------------------------- Telephone Number:
---------------------------- --------------------
Refer Reply To:
CC:INTL:B02
PLR-113627-21
Date:
October 14, 2021

             TY: ----------------

Legend

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

FC = ------------------------------------

Country = ----------------------

Tax Preparer = ------------------------

Date X = ----------------
Date Y = --------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------

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

This is in response to a letter dated June 15, 2021, submitted by your authorized
representative that requested the consent of the Commissioner of the Internal Revenue
Service (“Commissioner”) for Taxpayer to make a retroactive qualified electing fund
(“QEF”) election under section 1295(b) of the Internal Revenue Code (“Code”) and
Treas. Reg. §1.1295-3(f) with respect to Taxpayer’s investment in FC.
PLR-113627-21 2

The ruling contained in this letter is based upon information and representations
submitted on behalf of Taxpayer by his authorized representative, 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 this request for ruling, such
material is subject to verification on examination. The information submitted in the
request is substantially as set forth below.

FACTS

In Year 1, Taxpayer invested in FC, a company organized under the laws of Country
and treated as a corporation for U.S. income tax purposes. FC was at all relevant times
a passive foreign investment company (“PFIC”) as defined in section 1297(a) of the
Code. In Year 2, Taxpayer sold his interest in FC.

During the relevant years, Taxpayer engaged the services of Tax Preparer to prepare
his Forms 1040 and advise on Taxpayer’s international investments—including
Taxpayer’s investment in FC. Tax Preparer was competent to render international tax
advice with respect to Taxpayer’s investment in FC.

Taxpayer disclosed his investment to Tax Preparer and Tax Preparer failed to advise
Taxpayer on FC’s PFIC status, the significance of FC being a PFIC, the availability of a
QEF election, and the consequences of making or failing to make a QEF election with
respect to FC. Taxpayer was unaware that FC was a PFIC from Date X, when
Taxpayer acquired an interest in FC, through and in each relevant subsequent year until
Date Y, when Taxpayer sold his interest in FC. In Year 3, Tax Preparer discovered the
missed election when FC notified Taxpayer of FC’s PFIC status.

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. In addition, Taxpayer
represents that, as of the date of this 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 REQUESTED

Taxpayer requests the consent of the Commissioner to make a QEF election retroactive
to Year 1 with respect to its investment in FC under Treas. Reg. § 1.1295-3(f).

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.
PLR-113627-21 3

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:

   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).

Under Treas. Reg. §1.1295-3(g)(3)(iii), a taxpayer may request the consent of the
Commissioner to make a retroactive QEF election after the taxpayer sells the PFIC. A
shareholder does not need to own shares of the foreign corporation at the time the shareholder
makes a retroactive election with respect to the foreign corporation. Treas. Reg. §1.1295-
3(g)(3)(iii).
PLR-113627-21 4

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 retroactive QEF election with
respect to FC for 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.

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.

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.

In accordance with the Power of Attorney on file with this office, copies of this letter
ruling are being sent to your authorized representatives.

                                   Sincerely,



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

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