Missed a QEF Election? PLR 202636015 Shows the IRS Will Still Say Yes When You Relied on Your Accountant

Private Letter Ruling 202636015 (issued June 8, 2026; released September 4, 2026)

The short version

A domestic limited partnership discovered — a year late — that its two foreign subsidiaries had been passive foreign investment companies (PFICs) all along. Its accounting firm never flagged the issue, never mentioned a qualified electing fund (QEF) election, and never prepared a Form 8621. The IRS granted the partnership consent to make retroactive QEF elections for both foreign corporations under Treas. Reg. § 1.1295-3(f).

For anyone who owns foreign funds, holding companies, or offshore operating subsidiaries, this ruling is a useful reminder that a blown QEF election is often fixable — but only if you move before the IRS does.

Why the QEF election matters so much

A U.S. person holding PFIC stock faces one of three regimes. The default — the § 1291 "excess distribution" regime — is punitive: gain and excess distributions are thrown back across the holding period, taxed at the highest ordinary rates for each year, and hit with an interest charge. The QEF election under § 1295 replaces that with something far more rational: the shareholder simply includes a pro rata share of the PFIC's ordinary earnings and net capital gain each year, preserving capital-gain character and eliminating the interest charge.

The catch is timing. Under § 1295(b)(2), the election must generally be made by the due date (with extensions) of the return for the first year in the QEF regime. Miss that, and the shares are "unpedigreed" — a later election requires a purging election with its own tax cost.

Congress built in a safety valve: § 1295(b)(2) permits a late election, to the extent provided in regulations, where the shareholder failed to elect because it reasonably believed the company was not a PFIC. Treas. Reg. § 1.1295-3(f) is that regulation.

The four requirements under Treas. Reg. § 1.1295-3(f)

Consent to a retroactive election requires all four of the following:

1. Reasonable reliance on a qualified tax professional — Treas. Reg. § 1.1295-3(f)(2).

2. No prejudice to the interests of the U.S. government — Treas. Reg. § 1.1295-3(f)(3).

3. The request precedes audit — the request must be made before an IRS representative raises the PFIC status of the company on audit for any taxable year of the shareholder.

4. Compliance with the procedural requirements — Treas. Reg. § 1.1295-3(f)(4), which requires a ruling request and user fee filed with the Office of Associate Chief Counsel (International), plus penalty-of-perjury affidavits describing (i) the events leading to the failure to elect, (ii) how the failure was discovered, (iii) the engagement and responsibilities of the tax professional, and (iv) the extent of the shareholder's reliance.

The facts the IRS found persuasive

The ruling's fact pattern is worth reading closely, because it reads like a checklist:

• In Year 1, the taxpayer — a domestic limited partnership — wholly owned FC1, which in turn wholly owned FC2. Both were foreign corporations organized in the same country.

• Two domestic partners each held greater-than-10% interests; the remaining partners each held less than 10%.

• The partnership engaged an accounting firm in Year 1 for tax consulting and compliance services, and that firm was competent to render international tax advice regarding the investments in FC1 and FC2.

• The firm failed to identify that FC1 and FC2 were PFICs, and the taxpayer had no independent knowledge of PFIC status.

• The firm never advised the taxpayer to make a QEF election and never prepared a Form 8621 for either entity.

• In Year 2, the firm told the taxpayer that FC1 and FC2 had been PFICs in Year 1.

• The taxpayer submitted the required penalty-of-perjury affidavits and agreed to file amended returns for any affected subsequent years.

• As of the ruling request, the IRS had not raised PFIC status on audit for any year at issue.

On that record, the IRS concluded the taxpayer satisfied § 1.1295-3(f) and granted consent to make QEF elections for FC1 and FC2 retroactive to Year 1 — conditioned on the taxpayer complying with the time-and-manner rules of Treas. Reg. § 1.1295-3(g).

The ruling was signed by Melinda E. Harvey, Branch Chief, Branch 2, Associate Chief Counsel (International), under control numbers PLR-121408-24 and PLR-122701-24.

Practical takeaways

Reliance must be genuine reliance on a competent advisor. The IRS specifically recited that the accounting firm was competent to render international tax advice on these investments and that the taxpayer had no knowledge of PFIC status. A taxpayer who knew or suspected PFIC issues, or who engaged a preparer with no international capability, has a materially weaker position.

The audit clock is the hard deadline. The pre-audit requirement is not a soft factor to be balanced — once an examiner raises PFIC status for any year of the shareholder, the § 1.1295-3(f) door closes. Diagnose and file the request early.

Structure matters for who gets relief. Here the electing shareholder was the domestic partnership itself, not the partners. Where the U.S. owner is a partnership, the election is generally made at the partnership level, and the ruling's recitation of the partners' percentage interests reflects the disclosure the Service expects.

Amended returns are part of the price. Retroactive QEF treatment changes the income picture for the election year and every following year. Commit to the amendments up front; the ruling reflects that representation.

Two entities, one problem — address the whole chain. The taxpayer sought and received relief for both the first-tier and second-tier foreign corporations. When a PFIC issue surfaces in a tiered structure, run the analysis down every level.

A one-year lag is not fatal. The failure was discovered in Year 2 and the ruling issued in 2026. Timeliness is measured against the audit, not against the calendar alone — but the sooner the affidavits are prepared while memories and engagement records are fresh, the better.

A necessary caveat

Under § 6110(k)(3), a private letter ruling may not be used or cited as precedent. PLR 202636015 binds the IRS only as to the taxpayer that requested it. Its value is directional: it shows how the Associate Chief Counsel (International) currently weighs the § 1.1295-3(f) factors, and it confirms that the reasonable-reliance path remains a live remedy for missed QEF elections.

If you have recently learned that a foreign fund, holding company, or subsidiary is a PFIC — and you have not yet been contacted about it on examination — the window for retroactive relief is likely still open. It will not stay open forever.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources

• IRS, Private Letter Ruling 202636015 (full text): https://www.irs.gov/pub/irs-wd/202636015.pdf

• IRS Written Determinations index: https://www.irs.gov/written-determinations

• Bloomberg Tax, "IRS Issues PLR Granting Consent for Retroactive QEF Elections for PFICs": https://news.bloombergtax.com/daily-tax-report/irs-issues-plr-granting-consent-for-retroactive-qef-elections-for-pfics

• I.R.C. § 1295; Treas. Reg. §§ 1.1295-3(f), (g)

"I Didn't Know It Was Illegal" — Why a 78-Year-Old Bookkeeper Gets Another Shot at Her Tax Conviction

On September 8, 2026, the Tenth Circuit handed down United States v. Martin, No. 24-3140, and it is worth reading closely if you or a client ever faces a criminal tax charge. The court reversed the denial of a habeas motion and sent the case back to the district court because the defendant's lawyer appears never to have explained what the government actually had to prove.

What happened

Nancy Martin embezzled millions from her employers over several years. Her employers sued her in Kansas state court and won a default judgment of more than $11 million after she never appeared, apparently on her attorney's advice. The federal government then indicted her on one count of bank fraud and four counts of aiding or assisting in the filing of a false tax document, because she had not reported the stolen money as income.

On counsel's advice, she pleaded guilty to the bank fraud count and one tax count, and gave up her right to appeal. She was 78 at sentencing. The court varied downward and imposed 48 months on the fraud count and 36 months on the tax count, concurrently, plus $3.9 million in restitution — $3.2 million to her former employer and $700,000 to the IRS.

Her direct appeal was dismissed because of the appeal waiver. So she hired new counsel and attacked the convictions under 28 U.S.C. § 2255, arguing her trial lawyer had failed to tell her about two things that mattered enormously.

The tax problem: willfulness is the government's burden, not your defense

Section 7206(2) requires that the defendant act willfully. In tax cases, willfully is a term of art. Under Cheek v. United States, the government must prove the law imposed a duty on the defendant, that the defendant knew of that duty, and that she voluntarily and intentionally violated it. Congress set that bar high specifically so that a person is not made a criminal by a bona fide misunderstanding of the tax code.

At the change-of-plea hearing, Martin could not admit willfulness. She told the judge, in plain words, "at the time I did it, I didn't know it was illegal." That should have stopped the proceeding. Instead, the prosecutor suggested that intending to commit the acts was close enough, defense counsel agreed, and the plea was accepted.

Both the district court and the Tenth Circuit agreed that this was deficient performance. Where the district court went wrong was on prejudice. It framed the question as whether the government could have overcome Martin's asserted "good faith belief" — treating good faith as a defense she had to establish. That is backwards. Willfulness is an element, so the government must prove it beyond a reasonable doubt in its own case. Because the district court applied the wrong standard, the Tenth Circuit remanded for a fresh prejudice analysis.

The bank fraud problem: a check is not a statement

The second holding is the sleeper. Clause (2) of the bank fraud statute, 18 U.S.C. § 1344(2), reaches schemes to obtain bank property "by means of false or fraudulent pretenses, representations, or promises." In Loughrin v. United States, the Supreme Court called that means clause a significant textual limitation, satisfied only when the false statement is the mechanism that naturally induces the bank to part with money.

Martin never forged a check. The government's theory was that by presenting checks drawn on her employers' accounts, she implicitly represented that she had authority for those particular transfers. The Tenth Circuit was skeptical, pointing to Williams v. United States, where the Supreme Court held that "technically speaking, a check is not a factual assertion at all," and to the footnote in Loughrin endorsing the view that check kiting cannot be charged under clause (2) precisely because it involves no false representation. The government's best Tenth Circuit support was an unpublished 2006 decision that predates Loughrin and was never binding. A dissenting judge would have kept the implied-misrepresentation theory alive in the circuit.

Critically, the court did not have to decide whether Martin's reading of the statute wins. The question was whether a minimally competent defense lawyer should have found the argument and told her about it. The statute and Loughrin both predated her plea, and other defense lawyers were making the same argument at the same time. Counsel's affidavit never claimed a strategic reason for skipping it — and it mentioned reviewing "the applicable PIK instructions," the Kansas state pattern instructions, in a federal prosecution. The court found that telling.

The disposition

The Tenth Circuit reversed and remanded. The district court must hold an evidentiary hearing on whether counsel considered the Loughrin defense at all, whether she discussed it with Martin, and whether it would have changed Martin's decision to go to trial. It must also redo the prejudice analysis on the tax count under the correct standard. Because Martin was hoping for probation, the court noted she was unlikely to have gone to trial to fight only one of the two counts — so the two prejudice questions may rise and fall together.

Practical takeaways

• Embezzled money is taxable income. That has been settled law for decades, and failing to report it converts a civil dispute with your employer into a federal criminal case.

• In a criminal tax case, "I didn't understand the law" is not a weak excuse — it goes to an element the government must prove beyond a reasonable doubt. If you ever say that out loud in a plea colloquy, the plea should not go forward.

• Ask your lawyer to walk you through each element of each count and explain, element by element, what evidence the government has. If that conversation never happens, something has gone wrong.

• Writing checks you were generally authorized to sign is not automatically bank fraud. The government must identify a false statement that induced the bank to release funds, and courts are increasingly unwilling to treat a check itself as that statement.

• A plea agreement that waives your right to appeal does not waive everything. A § 2255 motion for ineffective assistance remains available, but it is a harder, slower road than getting the plea right the first time.

• Age, health, and a clean record can move a sentence below the guidelines, as they did here. They do not fix a plea to a crime the government could not prove.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Treasury and IRS Propose New Rules for Allocating Deductions to GILTI/NCTI Income Under the OBBBA

On September 10, 2026, the Treasury Department and the IRS released proposed regulations under REG-117273-25, scheduled for publication in the Federal Register on September 11, 2026. The guidance addresses how domestic corporations allocate and apportion deductions to foreign source section 951A category income — the income category that includes GILTI, now often called "net CFC tested income" or NCTI — for purposes of the foreign tax credit limitation, and how those same corporations calculate deduction eligible income (DEI) for the section 250 foreign-derived deduction.

For businesses that operate abroad through foreign corporations, or that claim the deduction for foreign-derived deduction eligible income (FDDEI), this preamble is required reading. Here is what it says, in plain terms, and what it means for planning going forward.

Why This Guidance Exists

The One, Big, Beautiful Bill Act (OBBBA), enacted July 4, 2025 (Public Law 119-21), rewrote two pieces of the international tax puzzle that determine how much foreign tax credit a company can actually use and how large its section 250 deduction can be:

·         Section 250(b)(3)(A) — which defines a domestic corporation's deduction eligible income — was amended so that DEI is now reduced by expenses and deductions "other than interest expense and research or experimental expenditures" properly allocable to that income.

·         Section 904(b)(5) — an entirely new provision — sets special rules for allocating and apportioning deductions to foreign source section 951A category income when calculating the foreign tax credit limitation under section 904(a).

Both changes apply to tax years beginning after December 31, 2025, but neither statutory provision spelled out the mechanics. The proposed regulations are Treasury's attempt to fill in those mechanics.

Change #1: Interest and R&E Expenses No Longer Shrink the FDII Deduction

Before the OBBBA, a domestic corporation computing its DEI (and, within that, its FDDEI) had to net out essentially all properly allocable deductions — including interest expense and research and experimental (R&E) expenditures — against its gross income. That netting shrank the section 250 deduction for companies carrying significant debt or R&E budgets.

Under amended section 250(b)(3)(A)(ii), interest expense and R&E expenditures are no longer taken into account when computing gross DEI and gross FDDEI. The proposed regulations implement this by:

·         Updating proposed § 1.250(b)-1(a) to reflect that DEI and FDDEI are reduced only by properly allocable "expenses and other deductions" actually deducted in the year, excluding interest expense and R&E expenditures;

·         Removing the reference to section 163(j) in § 1.250(b)-1(d)(2)(ii), since interest is no longer allocable to DEI/FDDEI at all; and

·         Defining "interest expense" broadly (any amount deductible under section 163, including original issue discount) and "R&E expenditures" broadly (anything deducted, including as an amortization deduction, under section 174, 174A, or 59(e)(2)(B)).

Practically, this means the FDII deduction should get larger for many exporters and service providers that carry debt or invest heavily in R&E, because those costs no longer drag down the income base the deduction is calculated on. Treasury also noted that a separate project is coming to address other OBBBA changes to section 250, including the removal of the deemed tangible income return from the section 250(a)(1)(A) calculation.

Change #2: A New Three-Bucket Test for the Foreign Tax Credit Limitation

The bigger structural change is new section 904(b)(5), which controls how much of a company's deductions get allocated against foreign source section 951A category income when calculating the foreign tax credit limitation. The proposed regulations (new § 1.904(b)-4) sort deductions into three buckets:

1.       Always allocated to foreign source 951A income: the section 250(a)(1)(B) deduction (the NCTI portion of the FDII/GILTI deduction) and the section 164(a)(3) deduction for state or local taxes imposed on that same income, using the existing allocation mechanics in §§ 1.861-8(e)(14) and (e)(6).

2.      Never allocated to foreign source 951A income: interest expense and R&E expenditures — full stop, regardless of how they would otherwise be apportioned under the general section 861 rules.

3.      Allocated only if "directly allocable": every other deduction, but only if it clears a materially higher bar than the everyday "properly allocable" standard.

That third bucket is where the preamble does the most interpretive work, because the statute never defines "directly allocable." Treasury concluded that the term requires a closer, more direct link between the deduction and the income than ordinary allocation-and-apportionment principles require. In practice, a deduction that is typically spread across income categories using a proxy — like the relative value of assets (the method used for interest expense) or relative gross receipts (the method used for R&E expenditures) — is not directly allocable, even if it isn't interest or R&E itself.

Using that test, the preamble gives concrete examples:

·         Not directly allocable: stewardship expenses and legal expenses, because both are types of deductions that get apportioned by a relative-value proxy under the existing rules.

·         Directly allocable: foreign currency loss under section 986(c) tied to a distribution of previously taxed earnings and profits (PTEP) assigned to the section 951A category, and a net operating loss (NOL) deduction under section 172 to the extent it is allocated to foreign source 951A income under the existing NOL sourcing rules.

What Happens to the Deductions That Don't Qualify

Deductions that fall into buckets two or three but fail the "directly allocable" test are not simply ignored — the second sentence of section 904(b)(5) reallocates them to U.S. source income instead. The proposed regulations implement this as a two-step process: first, allocate and apportion deductions to foreign source 951A income under the normal rules as if section 904(b)(5) didn't exist; then strip out (and reallocate to U.S. source income) whatever doesn't survive the statute's exclusions.

That reallocation is not just an accounting footnote it can affect several other calculations down the line, including:

·         Whether a company has a domestic loss or an overall domestic loss (ODL) under section 904(g), which determines how much prior foreign tax credit benefit gets recaptured;

·         Whether a company has an overall foreign loss (OFL) under section 904(f); and

·         How separate limitation losses in the section 951A category are calculated and carried between years.

Treasury acknowledged it is still studying whether further changes to the section 904(f) and (g) regulations are needed to fully reflect this reallocation approach — a signal that more guidance may be coming.

Comment Requests and Applicability Dates

Treasury is not treating this as settled. The preamble specifically invites comments on:

·         Whether further guidance is needed on applying section 904(b)(5) to deductions beyond the examples given; and

·         The proposed approach of using existing allocation rules — including the current bar on allocating R&E expenditures to section 951A category income — to determine which deductions get reallocated to U.S. source income.

Written comments and requests for a public hearing are due November 10, 2026, submitted through the Federal eRulemaking Portal at regulations.gov referencing REG-117273-25.

On timing, both sets of proposed rules the section 250(b)(3) changes and the new section 904(b)(5)/§ 1.904(b)-4 rules are proposed to apply to tax years beginning after December 31, 2025. Taxpayers may rely on the proposed regulations now, before they are finalized, but only if they and their related parties follow each set of proposed rules in its entirety no cherry-picking favorable provisions while ignoring others.

Practical Takeaways

·         Exporters and service providers with debt or R&E spend should revisit their FDII calculations for 2026  excluding interest and R&E expenditures from the DEI/FDDEI computation may meaningfully increase the section 250 deduction compared to pre-OBBBA years.

·         Multinationals should map their deductions against the new three-bucket test before relying on the proposed rules, since stewardship and legal expenses are called out as failing the "directly allocable" standard while NOLs and section 986(c) currency losses tied to the 951A category are called out as passing it.

·         Reliance is all-or-nothing. A taxpayer that wants the benefit of these proposed rules for a 2026 return must follow both the section 250 changes and the section 904(b)(5) changes in full — partial reliance is not permitted.

·         Watch for a second wave of section 250 guidance. Treasury has flagged separate forthcoming regulations addressing other OBBBA changes to section 250(a)(1)(A), including removal of the deemed tangible income return.

·         The comment window closes November 10, 2026. Businesses with a stake in how "directly allocable" gets defined — particularly around stewardship, legal, and other overhead-type deductions have a limited window to weigh in before these rules are finalized.

Bottom Line

REG-117273-25 gives multinational businesses their first real roadmap for two OBBBA changes that have been in effect on paper since the start of 2026 but lacked implementing mechanics: a larger, interest-and-R&E-free FDII deduction base, and a narrower, more literal "directly allocable" standard for deductions charged against GILTI/NCTI income for foreign tax credit purposes. Companies with existing FDII claims or CFC structures should model both changes now, while the comment period is open and reliance remains available for the 2026 tax year.

Need US  International Tax  Advice?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources: 

Department of the Treasury and IRS, REG-117273-25, "Allocation and Apportionment of Deductions to Foreign Source Section 951A Category Income and Deduction Eligible Income," Federal Register, September 11, 2026; 

KPMG TaxNewsFlash, September 10, 2026; 

Bloomberg Tax, "IRS Clarifies Meshing of Foreign Credit Limit With GOP Tax Law".