Taxpayers filed their U.S. federal income tax returns as a married couple filing jointly for the 5 years relevant to this letter ruling. In Year 1, they acquired an interest in FP, a Country X limited partnership treated as a partnership for U.S. federal income tax purposes. Since before Year 1, FP has invested in FC, a Country X corporation that is a passive foreign investment company (“PFIC”) within the meaning of section 1297(a) of the Code.
The Schedules K-1 and the Annual Intermediary Statements pursuant to Treas. Reg. § 1.1295-1(g) provided by FP to taxpayers disclose that FP has invested in a PFIC, and that as a foreign partnership FP cannot elect to treat the PFIC as a QEF. In these instances, the taxpayer must make the QEF election.
For the first two years Taxpayers engaged the services of Tax Preparer 1 to prepare their U.S. federal income tax returns. For Year 3 through Year 4, Taxpayers engaged the services of Tax Preparer 2 to prepare their U.S. federal income tax returns. Tax Preparer 1 and Tax Preparer 2 were competent to render advice with respect to Taxpayers' investment in FC through FP. However, Tax Preparer 1 and Tax Preparer 2 neither identified FC as a PFIC nor advised Taxpayers of the consequences of making, or failing to make, a QEF election with respect to FC.
For Year 5, Taxpayers engaged the services of Tax Preparer 3 to prepare their U.S. federal income tax returns. In the course of preparing Taxpayers' Year 5 return, Tax Preparer 3 determined that FC is a PFIC owned indirectly by Taxpayers since Year 1, but that Taxpayers had not made a QEF election. Tax Preparer 3 advised Taxpayers to contact a tax attorney to correct this matter, and Taxpayers engaged Law Firm to assist in requesting relief to make a retroactive QEF election with respect to FC. Taxpayers have submitted affidavits, under penalties of perjury, describing the events that led to the failure to make the QEF election by the election due date. Taxpayers were not currently under IRS audit.
Based on the information submitted and representations made with Taxpayers' ruling request, the IRS concluded that Taxpayers have satisfied Treas. Reg. § 1.1295-3(f). Accordingly, consent was granted to Taxpayers to make a retroactive QEF election with respect to FC for Year 1.