Retroactive QEF election allowed for undisclosed foreign company

Plain-English summary

A domestic partnership indirectly owned a minority interest in a foreign corporation through a foreign partnership. The foreign partnership's management did not tell the taxpayer that it had formed the corporation and contributed another foreign company to it, so the taxpayer and its accounting firm did not know the corporation existed or was a passive foreign investment company. They discovered the corporation years later after receiving an updated organizational chart. The taxpayer had not made a qualified electing fund election or reported its share of the PFIC's earnings, and the IRS had not raised the issue on audit. The IRS found that the taxpayer satisfied the regulatory requirements and allowed a QEF election retroactive to the corporation's first year.

Ruling snapshot

• Question: May the partnership make a retroactive QEF election for a PFIC whose existence was not disclosed to it?
• Outcome: Approved, subject to the filing rules for the retroactive election
• Key authorities: IRC §§ 1293, 1295, 1297; Treas. Reg. §§ 1.1295-3(f), 1.1295-3(g)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202432003 Third Party Communication: None
Release Date: 8/9/2024 Date of Communication: Not Applicable
Index Number: 1295.00-00, 1295.02-02
Person To Contact:
--------------------- ------------------------------, ID No. ------------
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----------------------------- Telephone Number:
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------------------------------------ Refer Reply To:
CC:INTL:B02
PLR-105838-22
Date:
May 16, 2024

              TY:

Legend

Taxpayer = ------------------------------------------------------------
FC = --------------------------------------
FC 2 = -----------------------------------------------
FP = -----------------------------
Country = ------------
X% = ---------
Accounting Firm = ----------------------------------------
Year 1 = -------
Year 2 = -------
Year 3 = -------
Year 4 = -------
Year 5 = -------
Year 6 = -------

Dear -------------------------------------------

This is in response to a letter submitted on Taxpayer’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 Taxpayer’s investment in FC.

The ruling contained in this letter is 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.
PLR-105838-22 2

FACTS

Taxpayer is a domestic limited liability company treated as a partnership for U.S. federal
income tax purposes. In Year 1, Taxpayer acquired an X% interest in FP, a limited
partnership organized under the laws of Country; FP is treated as a partnership for U.S.
federal income tax purposes. Since Year 1, FP has owned a direct or indirect interest in
FC 2, a limited company organized under the laws of Country; FC 2 is treated as a
corporation for U.S. federal income tax purposes.

In Year 2, FP formed, and became sole owner of, FC, a limited company organized
under the laws of Country; FC is treated as a corporation for U.S. federal income tax
purposes. Immediately after forming FC, FP contributed its interest in FC 2 to FC. As a
result, Taxpayer has owned an X% interest in FC since this transaction by reason of its
X% interest in FP. Since Taxpayer’s indirect X% interest in FC constitutes a minority
interest, Taxpayer does not manage FC. Rather, FC is managed by FP, its sole owner.
FP’s management did not notify Taxpayer at any time between Year 2 and Year 6 about
its formation of FC and its contribution of FC 2 to FC. Accordingly, since Taxpayer was
unaware of FC’s existence, Taxpayer was unaware that FC was a passive foreign
investment company (“PFIC”) as defined in section 1297(a) of the Code.

Taxpayer engaged Accounting Firm to prepare its U.S. partnership tax return for its
Year 2 through Year 4 taxable years. Accounting Firm was competent to render
international tax advice with respect to Taxpayer’s investment in FC and was provided
with all information that Taxpayer had regarding its investment in FP. However, since
Taxpayer was unaware of the existence of FC, Taxpayer did not inform Accounting Firm
of the same. Accordingly, Accounting Firm could not identify FC as a PFIC and
Taxpayer did not report FC as a PFIC on its U.S. partnership tax returns for any of its
Year 2 through Year 4 taxable years, did not make a timely QEF election with respect to
FC, and did not report its share of any of FC’s ordinary earnings or net capital gain
under section 1293. In Year 6, Taxpayer again engaged Accounting Firm to prepare its
U.S. partnership tax return for its Year 5 taxable year, at which point Taxpayer and
Accounting Firm received an updated organizational chart for FP, learned of the
existence of FC, and determined that FC was a PFIC since its formation in Year 2.

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 their 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.
PLR-105838-22 3

RULING REQUESTED

Taxpayers request the consent of the Commissioner to make a QEF election retroactive
to Year 2 with respect to their 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.

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).
PLR-105838-22 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 2, provided that Taxpayer complies with the rules under Treas.
Reg. § 1.1295-3(g) regarding the time for, and manner of, 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.

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.

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/ Melinda E. Harvey

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

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