Trust gets consent to make a late "qualified electing fund" election for its foreign fund investment

Plain-English summary

A domestic trust held an interest in a foreign company that is a passive foreign
investment company (PFIC). U.S. owners of a PFIC can elect to treat it as a
"qualified electing fund" (QEF) under section 1295, which generally produces
better tax treatment than the default PFIC rules, but the election normally has
to be made by the return due date. Here the trust's accountants never advised it
about the QEF election, so it was missed; the accountants later caught the
error. Treasury Regulation section 1.1295-3(f) lets the IRS consent to a
retroactive QEF election when the shareholder reasonably relied on a qualified
tax professional, the government is not prejudiced, and the request comes before
the IRS raises the company's PFIC status on audit. The trust paid an amount to
remove any prejudice and signed a closing agreement. The IRS concluded the
requirements were met and consented to the retroactive QEF election for the year
in question.

Ruling snapshot

• Question: Should the IRS consent to a retroactive QEF election for the trust's PFIC investment after its accountants failed to advise the election?
• Outcome: Approved (consent granted, with a closing agreement)
• 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: 202330005                                              Third Party Communication: None
Release Date: 7/28/2023                                        Date of Communication: Not Applicable
Index Number: 1295.02-02
                                                               Person To Contact:
------------------                                             ------------------, ID No. -----------------
--------------------------------------                         Telephone Number:
---------------------------------------------------            --------------------
-----------------------------------------                      Refer Reply To:
------------------------                                       CC:INTL:B02
                                                               PLR-113057-19
                                                               Date:
                                                               April 27, 2023


                       TY:

  Legend

   Taxpayer                      =          ------------------------------------------------------------------
                                            ------------------------------------
   Trust A                       =          ------------------------------
   FC                            =          ------------------------------------------------------------------
                                            --
   Country                       =          ----------------------
   Accounting Firm               =          -------------------
   Company                       =          --------------------------------------------
   Year 1                        =          -------
   Year 2                        =          -------
   Year 3                        =          ------


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

  This is a response to a letter 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 (the “Code”)
  and Treas. Reg. § 1.1295-3(f) with respect to Taxpayer’s investment in FC.

  The ruling contained in this letter is based upon information and representations
  submitted on behalf of Taxpayer 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.
PLR-113057-19                              2



FACTS

Taxpayer, a domestic trust formed from the bifurcation of Trust A, has filed its
federal income tax return for all tax years relevant to this letter ruling. In Year 1,
Trust A invested in FC, an entity organized under the laws of Country. In Year 2,
Taxpayer was created as a result of the division of Trust A into two separate trusts
and Taxpayer was apportioned its proportionate share of Trust A’s assets,
including an interest in FC as a result of the bifurcation. FC was a passive foreign
investment company (PFIC) within the meaning of section 1297(a) on the date that
Taxpayer acquired an interest in FC and in each relevant subsequent year.

During the relevant years, Taxpayer and Trust A engaged the services of
Accounting Firm to prepare its federal income tax returns and the services of
Company to provide trust administration services. Company, in its capacity as trust
administrator, provided Accounting Firm with all of the necessary tax return
information for the preparation of Taxpayer’s income tax returns. Accounting Firm
was competent to render tax advice, including with respect to Taxpayer’s
investment in FC. Taxpayer was not advised on the availability of a QEF election
and the consequences of making or failing to make a QEF election with respect to
Trust A’s investment in FC.

In Year 3, Accounting Firm discovered the missed election and informed
Taxpayer. 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 paid an amount sufficient to eliminate any prejudice to the United
States government as a consequence of their inability to file amended returns, in
accordance with a signed closing agreement between Taxpayer and the
Commissioner. Further, Taxpayer has agreed to file an amended return for each
of the subsequent taxable years affected by the retroactive election, if any.

In addition, Taxpayer represents that, as of the date of this request for ruling, the
PFIC status of FC has not be 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 for Year 2 under Treas. Reg. § 1.1295-3(f) with respect to its
investment in FC.
PLR-113057-19                                 3

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 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
PLR-113057-19                               4

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 2 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. We have, consequently, approved a closing agreement
with Taxpayer with respect to those issues affecting its tax liability for closed years
on the basis set forth above. Pursuant to our practice with respect to such
agreements, the agreement contains a stipulation to the effect that any change or
modification of applicable statutes enacted subsequent to the date of this
agreement and made applicable to the taxable period involved will render the
agreement ineffective to the extent that it is dependent upon such statutes.

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,

                                        /s/ Melinda E. Harvey

                                        Melinda E. Harvey
                                        Branch Chief, Branch 2
                                        Associate Chief Counsel (International)


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