SECTION 2. BACKGROUND

.01 QEF Elections . Generally, a foreign corporation is a PFIC under section 1297 for a taxable year if the foreign corporation satisfies either the income or asset test of section 1297(a) for that year. A foreign corporation is a PFIC under the income test if 75 percent or more of its gross income for its taxable year is passive income. Alternatively, under the asset test, a foreign corporation is a PFIC if 50 percent or more of its assets, measured by average annual value or adjusted bases (as determined pursuant to Treas. Reg. § 1.1297-1(d)), during its taxable year are assets that produce, or are held for the production of, passive income.

Pursuant to section 1291, certain distributions by a PFIC and gains recognized on dispositions of its stock included in the income of the PFIC shareholder generally are subject to ordinary income treatment and an interest charge (excess distribution rules). A PFIC shareholder may avoid

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will not be treated as a QEF for any taxable year in which the foreign corporation is not a PFIC under section 1297(a), and the PFIC shareholder is not required to take into account under section 1293 its pro rata share of the foreign corporation’s ordinary earnings and net capital gain for such year or to satisfy the section 1295 annual reporting requirements for such year. However, if a PFIC shareholder makes a QEF election for any year after the first taxable year in which the foreign corporation was a PFIC with respect to the shareholder, then that stock continues to be treated as PFIC stock under section 1298(b)(1) (often referred to as the “once a PFIC, always a PFIC” rule), and the PFIC shareholder continues to be subject to the excess distribution rules in addition to the QEF rules after the PFIC shareholder makes the QEF election (such QEF, an unpedigreed QEF). Under Treas. Reg. §§ 1.1291-9 and 1.1291-10, a PFIC shareholder may purge the PFIC taint in this circumstance and make the PFIC a pedigreed QEF with respect to the PFIC shareholder by electing to recognize gain on a deemed sale of its PFIC stock or, in the case of a PFIC that is also a controlled foreign corporation (as defined in section 957(a)), electing to recognize a deemed dividend from the PFIC, while simultaneously making a QEF election.

Under Treas. Reg. § 1.1295-1(f)(1), a PFIC shareholder makes a QEF election by: (i) properly completing a Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund ; (ii) attaching Form 8621 to its Federal income tax return filed by the election due date for the PFIC shareholder’s election year; and (iii) receiving, and reflecting in Form 8621, the information provided in the PFIC Annual Information Statement described in Treas. Reg. § 1.1295-1(g)(1), the Annual Intermediary Statement described in Treas. Reg. § 1.1295-1(g)(3), or the applicable combined statement described in Treas. Reg. § 1.1295-1(g)(4) (a Combined Statement) for the taxable year of the PFIC ending with or within the taxable year for which Form 8621 is being filed. Further, if the PFIC Annual Information Statement contains a statement that the foreign corporation has permitted the PFIC shareholder

to examine the books of account, records, and other documents of the foreign corporation for the PFIC shareholder to calculate the amounts of the PFIC’s ordinary earnings and net capital gain according to Federal income tax accounting principles and to calculate the PFIC shareholder’s pro rata shares of those amounts (as described in Treas. Reg. § 1.1295-1(g)(1) (ii)(C)), the PFIC shareholder must attach a statement to Form 8621 that indicates that the PFIC shareholder, not the PFIC, calculated the PFIC’s ordinary earnings and net capital gain.

.02 Retroactive QEF Elections . Section 1295(b)(2) provides that, to the extent permitted under regulations, a PFIC shareholder may make a QEF election for a taxable year after the election due date (retroactive QEF election) if the PFIC shareholder fails to make a timely election because the PFIC shareholder reasonably believed that the foreign corporation was not a PFIC. Thus, if eligible, a PFIC shareholder may make a QEF election retroactive to the first taxable year in which that PFIC shareholder held stock of that PFIC and, as a result, the PFIC would be a pedigreed QEF with respect to the PFIC shareholder.

Treas. Reg. § 1.1295-3 provides two sets of rules for making a retroactive QEF election, which are the exclusive rules under which a PFIC shareholder may make a retroactive QEF election. Relief for failure to make a timely QEF election is therefore not available under any other provision of law, including under Treas. Reg. §§ 301.9100-1 through -3.

Under the first set of rules, as provided under Treas. Reg. § 1.1295-3(b) (protective regime), to make a retroactive QEF election, a PFIC shareholder must have: (i) reasonably believed, as of the election due date, that the foreign corporation was not a PFIC for its taxable year that ended during the retroactive election year; (ii) filed a protective statement applicable to the retroactive election year with respect to the foreign corporation as described in Treas. Reg. § 1.1295-3(b)(2); and (iii) complied with the other terms and conditions of the protective statement. Treas. Reg. § 1.1295-3(e) provides special rules for certain minority PFIC shareholders to meet the reasonable belief requirement under Treas. Reg. § 1.1295-3(b)(1).

Under the second set of rules, as provided under Treas. Reg. § 1.1295-3(f), a PFIC shareholder that has not satisfied the requirements of the protective regime under Treas. Reg. § 1.1295-3(b) or (e) may request consent of the Commissioner to make a retroactive QEF election. Under Treas. Reg. § 1.1295-3(f)(1), the Commissioner will grant relief only if (i) the PFIC shareholder reasonably relied on a qualified tax professional, (ii) granting consent will not prejudice the interests of the United States government ( see section 4.02(3) of this revenue procedure), (iii) the PFIC shareholder requests consent before the IRS raises upon audit the PFIC status of the corporation for any taxable year of the PFIC shareholder, and (iv) the PFIC shareholder satisfies certain procedural requirements for obtaining relief.

Treas. Reg. § 1.1295-3(f)(2) sets forth rules for determining whether a PFIC shareholder reasonably relied on a qualified tax professional, including that a PFIC shareholder is deemed to have reasonably relied on a qualified tax professional only if the PFIC shareholder reasonably relied on a qualified tax professional (including a tax professional employee of the PFIC shareholder) who failed to identify the foreign corporation as a PFIC or failed to advise the PFIC shareholder of the consequences of making, or failing to make, a QEF election. See section 4.02(2)(e) of this revenue procedure for more detail regarding the statement of facts that a PFIC shareholder must provide in connection with these rules.

.03 Requesting IRS Consent to Make a Retroactive QEF Election .

Treas. Reg. § 1.1295-3(f)(4) provides that a PFIC shareholder requests consent to make a retroactive QEF election by filing a ruling request with the Office of Associate Chief Counsel (International) (retroactive QEF election ruling request). The retroactive QEF election ruling request must satisfy the general requirements, including payment of the user fee, for ruling requests filed with Associate offices as set forth in Rev. Proc. 2026-1.

The retroactive QEF election ruling request must include certain affidavits. Under Treas. Reg. § 1.1295-3(f)(4)(ii), the ruling request must include a detailed affidavit from the PFIC shareholder, or a person authorized to sign a Federal

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income tax return on behalf of the PFIC shareholder, describing the events that led to the failure to make a QEF election by the election due date, and the discovery of that failure. The PFIC shareholder’s affidavit must describe the engagement and responsibilities of the qualified tax professional as well as the extent to which the PFIC shareholder relied on the tax professional. The PFIC shareholder, or the individual signing for an entity, must sign the affidavit under penalties of perjury. An individual that signs for an entity must have personal knowledge of the facts and circumstances at issue.

The retroactive QEF election ruling request must also include detailed affidavits from individuals having knowledge or information about the events that led to the failure to make a QEF election by the election due date and to the discovery of that failure. See Treas. Reg. § 1.1295-3(f)(4)(iii). These individuals must include the qualified tax professional upon whose advice the PFIC shareholder relied, as well as any individual (including an employee of the PFIC shareholder) who made a substantial contribution to the return’s preparation, and any accountant or attorney, knowledgeable in tax matters, who advised the PFIC shareholder regarding its ownership of the stock of the foreign corporation. Each affidavit must describe the individual’s engagement and responsibilities as well as the advice concerning the tax treatment of the foreign corporation that the individual provided to the PFIC shareholder. Each affidavit also must include the individual’s name, address, and taxpayer identification number, and must be signed by the individual under penalties of perjury.

The PFIC shareholder must provide any additional information requested by the Commissioner in connection with the retroactive QEF election ruling request. See Treas. Reg. § 1.1295-3(f)(4)(iv). The PFIC shareholder is also required to notify the branch of the Office of Associate Chief Counsel (International) handling the request if, while the request is pending, the IRS begins an examination of the PFIC shareholder’s return for the retroactive election year or any subsequent taxable year during which the PFIC shareholder holds stock of the foreign corporation. See Treas. Reg. § 1.1295-3(f)(4)(v).