A partnership received retroactive QEF elections for twenty-one PFIC funds

Plain-English summary

A domestic partnership invested in twenty-one sub-funds of a foreign umbrella investment company over two years. Its experienced tax adviser had access to the relevant records but failed to identify the sub-funds as passive foreign investment companies or advise about qualified electing fund elections. The fund administrator later notified the partnership of the PFIC status, and the partnership sought relief before the IRS raised the issue on audit. The partnership paid the amount required under a closing agreement to eliminate prejudice from closed years. The IRS consented to retroactive QEF elections for nine first-year funds and twelve second-year funds, subject to the prescribed filing rules.

Ruling snapshot

• Question: Could the partnership make retroactive QEF elections for twenty-one PFIC investments after reasonably relying on a tax adviser who missed their PFIC status?
• Outcome: Approved
• Key authorities: IRC §§ 1295 and 1297(a); Treas. Reg. §§ 1.1295-3(f) and 1.1295-3(g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202252006 Third Party Communication: None
Release Date: 12/30/2022 Date of Communication: Not Applicable
Index Number: 1295.02-02
Person To Contact:
----------------------------- -----------------------, ID No. -----------------
-------------------------- Telephone Number:
----------------------------------------- --------------------
--------------------------------------- Refer Reply To:
------------------------------- CC:INTL:B02
PLR-127482-17
Date:
October 04, 2022

            TY:

Legend

Shareholder = -----------------------------------------
-----------------------
Fund1 = --------------------------------------------------------
Fund2 = ----------------------------------------------------------------------
Fund3 = ------------------------------------------------------------------
Fund4 = ------------------------------------------------------------------
Fund5 = -----------------------------------------------------
Fund6 = ----------------------------------------------------------------------------
Fund7 = ------------------------------------------------------------------------------------------
Fund8 = ------------------------------------------------------------------------------------------
Fund9 = ------------------------------------------------------------------------------------------
Fund10 = -------------------------------------------------------------
Fund11 = ----------------------------------------------------------------
Fund12 = ---------------------------------------------------------------------
Fund13 = ---------------------------------------------------
Fund14 = --------------------------------------------------------------
Fund15 = ------------------------------------------------------------------------------------------
Fund16 = ---------------------------------------------------------------------------
Fund17 = -------------------------------------------------------------------------
Fund18 = -------------------------------------------------------------
Fund19 = ---------------------------------------------------------------
Fund20 = -------------------------------------------------------------------------
Fund21 = ----------------------------------------------------------------------
Year1 = -------
Year2 = -------
PLR-127482-17 2

Year3 = -------
Member1 = -------------------------------
Member2 = -----------------------------
UmbrellaFund= --------------------------------------------------
CountryX = ---------
Tax Advisor = ----------------------------------------

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

This is in response to a letter submitted by Shareholder’s authorized representative that
requested the consent of the Commissioner of the Internal Revenue Service
(Commissioner) for Shareholder to make retroactive qualified electing fund (QEF)
elections under section 1295(b) of the Internal Revenue Code and Treas. Reg. §1.1295-
3(f) with respect to Shareholder’s investments in Fund1, Fund2, Fund3, Fund4, Fund5,
Fund6, Fund7, Fund8, Fund9, Fund10, Fund11, Fund12, Fund13, Fund14, Fund15,
Fund16, Fund17, Fund18, Fund19, Fund20, and Fund 21.

The rulings contained in this letter are based upon information and representations
submitted on behalf of Shareholder by its 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

Shareholder is a domestic limited liability company classified as a partnership for U.S.
federal income tax purposes. In Year1, Shareholder was owned by Member1, the
majority partner, and Member2, the minority partner. Member1 is a domestic limited
liability company classified as a partnership for U.S. federal income tax purposes whose
members consist of domestic and foreign individuals and domestic trusts. Member2 is a
domestic corporation. At the end of Year2, Shareholder was wholly owned by Member1.

UmbrellaFund is an investment company (affiliated with Shareholder’s investment
group) that has variable share capital and segregated liability between various sub-
funds. UmbrellaFund (together with its sub-funds) is incorporated in CountryX and
treated as a corporation for U.S. tax purposes. The share capital of UmbrellaFund is
divided into different series of shares, with each series of shares representing a
separate investment portfolio of assets.

In Year1, Shareholder made investments into the following sub-funds of UmbrellaFund:
Fund1, Fund2, Fund3, Fund4, Fund5, Fund6, Fund7, Fund8, and Fund9. In Year2,
Shareholder made investments into the following sub-funds of UmbrellaFund: Fund10,
Fund11, Fund12, Fund13, Fund14, Fund15, Fund16, Fund17, Fund18, Fund19,
PLR-127482-17 3

Fund20, and Fund21. The funds are collectively referred to as “Investment Funds.” The
Investment Funds were, at all relevant times, passive foreign investment companies
(PFICs) with respect to Shareholder as defined under section 1297(a).

For Year1 through Year2, Shareholder engaged Tax Advisor to prepare its U.S. federal
partnership returns and its tax filings related to the Investment Funds. In Year1 through
Year2, Tax Advisor, employing experienced tax professionals, advised Shareholder with
respect to U.S. federal income tax matters relating to Shareholder’s investments in the
Investment Funds. Shareholder made available to Tax Advisor the books and records of
the Investment Funds and any other information requested by Tax Advisor to provide
tax advice and prepare Shareholder’s tax returns. Tax Advisor held itself out as a
qualified tax professional, and Shareholder reasonably believed that Tax Advisor was
competent to render tax advice with respect to the ownership of shares of a foreign
corporation.

Tax Advisor did not identify the Investment Funds as PFICs. In a subsequent year
(Year3), the fund administrator for the Investment Funds notified Shareholder that the
Investment Funds were PFICs. Shareholder immediately contacted Tax Advisor
concerning this matter.

Shareholder has submitted an affidavit, signed under penalties of perjury, describing the
events that led to the failure to make the QEF elections before the election due date,
including the role of Tax Advisor. Shareholder represents that Tax Advisor did not
identify the Investment Funds as PFICs or advise Shareholder of the possibility of
making a QEF election with respect to the Investment Funds, and thus did not advise
Shareholder of the consequences of making, or failing to make, a QEF election for the
first year of investment in each of the Investment Funds. Shareholder has also
submitted an affidavit from Tax Advisor, signed under penalties of perjury, corroborating
the statements made by Shareholder. Shareholder has paid an amount sufficient to
eliminate any prejudice to the United States government as a consequence of its
inability to file amended returns for closed years, in accordance with a signed closing
agreement between Shareholder and the Commissioner.

Shareholder represents that, as of the date of its request for ruling, the PFIC status of
any of the Investment Funds had not been raised by the Internal Revenue Service (IRS)
on audit for any of the taxable years at issue.

RULING REQUESTED

Shareholder requests the consent of the Commissioner to make retroactive QEF
elections with respect to Fund1, Fund2, Fund3, Fund4, Fund5, Fund6, Fund7, Fund8
and Fund9 for Year1, and Fund10, Fund11, Fund12, Fund13, Fund14, Fund15,
PLR-127482-17 4

Fund16, Fund17, Fund18, Fund19, Fund20, and Fund21 for Year2 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.

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 IRS 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).
PLR-127482-17 5

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 retroactive QEF elections with
respect to Fund1, Fund2, Fund3, Fund4, Fund5, Fund6, Fund7, Fund8 and Fund9 for
Year1, and Fund10, Fund11, Fund12, Fund13, Fund14, Fund15, Fund16, Fund17,
Fund18, Fund19, Fund20, and Fund21 for Year2, provided that Shareholder 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 Shareholder with respect to those issues affecting its tax liability 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 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
ruling is being sent to your authorized representatives.

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,

                                   /s/ Kristine Crabtree

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

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