PLR 200209054: Late mark-to-market election denied

Plain-English summary

A securities trader missed the deadline to elect the § 475(f) mark-to-market accounting method and then used that method on a later return. The IRS denied an extension because the election was an accounting method election requiring a § 481(a) adjustment. Relief would therefore prejudice the government unless unusual and compelling circumstances existed, and the taxpayer had not shown such circumstances. The IRS concluded that the taxpayer's mark-to-market reporting was improper without a timely election.

Ruling snapshot

• Question: May the trader make a late § 475(f) mark-to-market election?
• Outcome: Denied: no extension was granted.
• Key authorities: IRC § 475(f); Treas. Reg. § 301.9100-3; Rev. Proc. 99-17 and Rev. Proc. 99-49.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200209054
Washington, DC 20224
Release Date: 3/1/2002
Index Number: 475.08-00, 9100.00-00
Person to Contact:

Telephone Number:
(202) 622-3920
Refer Reply To:
CC:FIP: /PLR-119220-01
Date:
December 5, 2001

LEGEND

Taxpayer =

Month 1 =

Year 1 =

Year 2 =

Year 3 =

Date 2 =

X
=

Dear:

This is in reply to a letter dated March 27, 2001, and subsequent correspondence, submitted by your authorized representative, requesting an extension of time under section 301.9100 of the Procedure and Administration Regulations to make an election under section 475(f) of the Internal Revenue Code to use the mark-to- market method of accounting for the Year 2 tax year.

FACTS

Taxpayer is married and files a joint tax return using the cash method of accounting. Taxpayer represents that he has engaged in the trade or business of securities trading from Month 1 of Year 1 to the present time.

Taxpayer relies on tax professionals for tax advice and return preparation. At the end of Year 1, Taxpayer consulted a certified public accountant (CPA) in connection with the preparation of his overall income tax return for Year 1. In preparing Taxpayer’s Year 1 tax return, CPA and Taxpayer decided that mark-to-market was the most appropriate method of accounting for Taxpayer’s trading activities. As such, Taxpayer intended to use the mark-to-market accounting method for his trading business beginning in Year 2. CPA represents that, at the time he prepared Taxpayer’s Year 1 tax return, he was not aware that a taxpayer intending to make an election under

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section 475(f) to use mark-to-market accounting for Year 2 must file an election statement not later than the due date (without regard to extensions) of the original federal income tax return for Year 1 and must be attached either to that return or, if applicable, to a request for an extension of time to file that return. It was not until after Date 2 (the due date of Taxpayer’s Year 1 return) that CPA discovered the election statement should have been filed with the Year 1 return. Therefore, Taxpayer did not file the election statement by Date 2.

In Month 1 of Year 3, Taxpayer filed his Year 2 tax return and applied mark-to- market accounting to the securities used in Taxpayer’s securities trading business. Taxpayer included with his Year 2 tax return an election statement and a Form 3115, Application for Change in Accounting Method, requesting a change to the mark-to- market method of accounting beginning with Year 2. The Form 3115 filed by Taxpayer indicates a $X section 481(a) adjustment that was factored into Taxpayer’s Year 2 income tax return.

LAW AND ANALYSIS

Section 475(f) provides that a taxpayer engaged in a trade or business as a trader in securities may elect to apply the mark-to-market accounting method to securities held in connection with such trade or business. See section 475(f)(1). Section 7805(d) provides that, except to the extent otherwise provided by the Code, any election shall be made at such time and in such manner as the Secretary shall prescribe.

On February 16, 1999, the Internal Revenue Service published Rev. Proc. 99-17, 1999-1 C.B. 503, section 6 superseded by Rev. Proc. 99-49, 1999-2 C.B. 725. Rev. Proc. 99-17 provides the exclusive procedure for traders in securities to make an election to use the mark-to-market method of accounting under section 475(f). Section 5.03(1) of Rev. Proc. 99-17 provides, in relevant part, that taxpayers (other than a taxpayer for which no federal income tax return was required to be filed for the taxable year immediately preceding the election year) make an election under section 475(f) for a tax year beginning on or after January 1, 1999, by filing a statement no later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year. The statement must be attached to either that return or to a request for an extension of time to file that return. Section 5.03 of Rev. Proc. 99-17. The statement must describe the election being made, the first taxable year for which the election is effective, and the trade or business for which the election is made. Section 5.04 of Rev. Proc. 99-17.

Section 4 of Rev. Proc. 99-17 states that the election under section 475(f) determines the method of accounting an electing trader is required to use for federal income tax purposes for securities subject to the election. A method of accounting for securities subject to the election is impermissible unless the method is in accordance with section 475 and the regulations thereunder. If an electing trader’s method of accounting for its taxable year immediately preceding the election year is inconsistent

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with section 475, the taxpayer is required to change its method of accounting to comply with its election. Thus, a taxpayer that makes a section 475(f) election but fails to change its method of accounting to comply with that election is using an impermissible method.

Section 6.03 of Rev. Proc. 99-17 provides that a taxpayer that changes its method of accounting pursuant to Rev. Proc. 99-17 must take into account the net amount of the section 481(a) adjustment. The section 481(a) adjustment generally is taken into account ratably over four taxable years beginning with the year of change. Section 6.03 of Rev. Proc. 99-17 and section 5 of Rev. Proc. 99-49.

Section 301.9100-1(c) of the regulations provides, in part, that the Commissioner has discretion to grant a reasonable extension of time to make a regulatory election (defined in section 301.9100-1(b) as an election whose due date is prescribed by regulations published in the Federal Register, or by a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin), or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.
Sections 301.9100-3(a) through (c)(1)(i) set forth rules that the Internal Revenue Service generally will use to determine whether, under the facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of section 301.9100-2. Section 301.9100-3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of section 301.9100-3, when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the Service, the taxpayer will be deemed to have acted reasonably and in good faith; and section 301.9100-3(c) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made (taking into account the time value of money).

Section 301.9100-3(b)(3) provides, in part, that a taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer uses hindsight in requesting relief. If specific facts have changed since the due date for making the election that make the election advantageous to the taxpayer, the Service will not ordinarily grant relief. In such a case, the Service will grant relief only when the taxpayer provides strong proof that the taxpayer’s decision to seek relief did not involve hindsight.

Section 301.9100-3(c)(2) provides special rules for accounting method regulatory elections. This section provides, in relevant part, that the interests of the Government are deemed to be prejudiced by granting an extension of time, except in unusual and compelling circumstances, if the accounting method regulatory election is subject to the procedure described in section 1.446-1(e)(3)(i) (requiring the advance written consent of the Commissioner) or if the accounting method regulatory election for which relief is requested requires an adjustment under section 481(a) (or would require an adjustment under section 481(a) if the taxpayer changed to the method of accounting for which

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relief is requested in a taxable year subsequent to the taxable year the election should have been made).

As noted above, section 4 of Rev. Proc. 99-17 states that the election under section 475(f) determines the method of accounting an electing trader is required to use for federal income tax purposes for securities subject to the election. If an electing trader’s method of accounting for its taxable year immediately preceding the election year is inconsistent with section 475, the taxpayer is required to change its method of accounting to comply with its election. A taxpayer that makes a section 475(f) election but fails to change its method of accounting to comply with that election is using an impermissible method. Because the election is integrally related to the change in accounting method to mark-to-market, it is an accounting method regulatory election subject to section 301.9100-3(c)(2).

Rev. Proc. 99-49 provides procedures by which a taxpayer may obtain automatic consent to change to the mark-to-market accounting method. However, the automatic change applies to a taxpayer only if the taxpayer has made a valid election under section 475(f) and is required to change its method of accounting to comply with the election. Section 10A.02(2)(a)(i) of the Appendix to Rev. Proc. 99-49.

Taxpayer requests an extension of time to make an accounting method regulatory election that is subject to the provisions of section 301.9100-3(c)(2). Because Taxpayer failed to make a timely section 475(f) election pursuant to Rev. Proc. 99-17, the accounting method regulatory election is subject to section 301.9100- 3(c)(2)(i). Further, because the accounting method regulatory election requires a section 481(a) adjustment, it is also subject to section 301.9100-3(c)(2)(ii). Therefore, under section 301.9100-3(c)(2), absent unusual and compelling circumstances, a grant of relief is deemed to prejudice the interests of the Government.

Based on the facts and representations submitted, we conclude that Taxpayer has not satisfied the requirements for our granting a reasonable extension of time to make an election under section 475(f) to use the mark-to-market method of accounting. Taxpayer has failed to demonstrate unusual and compelling circumstances regarding his failure to make a timely election sufficient to overcome the presumption of prejudice to the Government’s interests.

CONCLUSION

Taxpayer’s request for an extension of time to make the section 475(f) election for Year 2 is denied. Because Taxpayer’s request for relief is denied pursuant to section 301.9100-3(c)(2) for lack of unusual and compelling circumstances, it is unnecessary for us to consider Taxpayer’s assertion that he acted reasonably and in good faith under section 301.9100-3(b), without using hindsight in requesting relief. Taxpayer may not change his method of accounting without making a timely section 475(f) election; therefore, Taxpayer’s reporting of income using the mark-to-market method of accounting on his Year 2 tax return was improper.

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No opinion is expressed as to the tax treatment of the transaction under the provisions of any other sections of the Code and regulations, which may be applicable thereto, or the tax treatment of any conditions existing at the time of or effects resulting from the transaction, which are not specifically set forth by the above ruling.

This ruling is directed only to the taxpayer who requested 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 is being sent to Taxpayer’s authorized representative.

Sincerely yours,
ALVIN J. KRAFT
Chief, Branch 1
Office of Associate Chief Counsel
(Financial Institutions & Products)

Enclosures:
Copy of this letter
Section 6110 Copy