Reasonable cause supported late mixed-straddle-account elections

Plain-English summary

An investment business intended to establish mixed straddle accounts after acquiring an entity that became disregarded for federal tax purposes. Its return preparer misunderstood the acquired entity’s classification and attempted to make the elections by attaching statements to extension forms rather than using Form 6781. After reviewing the transaction more closely, the preparer recognized the entity’s termination as a partnership and the need for elections at the taxpayer level. The IRS found reasonable cause for the failures and granted extensions for elections effective on two specified dates. The ruling did not decide whether the attempted filings substantially complied with the prescribed method or whether the designated classes of activities were permissible.

Ruling snapshot

• Request: Permit late elections to establish mixed straddle accounts
• Outcome: Approved for both requested effective dates based on reasonable cause
• Key authorities: Temp. Treas. Reg. § 1.1092(b)-4T

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201543008                                                 Third Party Communication: None
Release Date: 10/23/2015                                          Date of Communication: Not Applicable
Index Number: 1092.00-00, 1092.05-00,
              1092.05-02                                          Person To Contact:
                                                                  ------------------------, ID No. ------------------
--------------------------------------------------                ----------------------------------------------------
-----------------------------------                               Telephone Number:
------------------------------                                    ----------------------
 ------------------------------------------                       Refer Reply To:
                                                                  CC:FIP:B06
                                                                  PLR-104600-15
                                                                  Date:
                                                                  July 28, 2015



Legend:

Taxpayer                   =        -----------------------------------
                                    ------------------------

Entity 1                   =        ------------------------------------

Entity 2                   =        ------------------

Entity 3                   =        ------------------------------------------

Jurisdiction 1             =        -----------------------

Accountant 1               =        --------------------------

Accountant 2               =        ------------------------------------------------

Tax Year 1                 =        --------------------------------------------------------

Tax Year 2                 =        --------------------------------------------------------

Date 1                     =        ---------------------------

Date 2                     =        ----------------------

Date 3                     =        ----------------------
PLR-104600-15                                   2



Dear ------------------:

        This is in reply to a letter dated January 29, 2015, submitted on behalf of
Taxpayer by its authorized representative. Taxpayer requests an extension of time to
file an election under section 1092(b) of the Internal Revenue Code of 1986 and section
1.1092(b)-4T(f) of the Temporary Income Tax Regulations.

                                                FACTS

       Taxpayer is in the business of investing in various entities that trade U.S. and
foreign financial securities, as well as providing investment management services to
certain of said entities.

        As of the close of business on Date 1, Taxpayer purchased the entire partnership
interest which Entity 1 held in Entity 2, an exempted company organized under the laws
of Jurisdiction 1.

    Taxpayer had no officers or directors and was managed by two managing
members, neither of whom possessed extensive knowledge of U.S. Federal tax law.

        For periods through Date 1, Entity 1 and Entity 3 each owned an interest in the
profits (loss) of Entity 2. Only Entity 1, however, owned a capital interest in Entity 2. At
the close of business on Date 1, but immediately prior to Taxpayer’s purchase of Entity
1’s entire partnership interest in Entity 2, Entity 3 transferred its profits (loss) interest in
Entity 2 to Entity 1.

       Taxpayer, which did not employ an internal tax department or internal tax
professionals, previously engaged a third-party tax professional, Accountant 1, to
prepare federal income tax returns for Taxpayer. Immediately following Taxpayer’s
purchase of Entity 1’s interest in Entity 2, Taxpayer engaged Accountant 2 to perform its
federal tax compliance function. This arrangement was terminated shortly thereafter and
Accountant 1 was again engaged just prior to the preparation of Taxpayer’s Form 7004,
Application for Automatic Extension of Time to File Certain Business Income Tax,
Information, and Other Returns (“Form 7004”), for Tax Year 1.

       Accountant 1, unaware that Entity 2 had terminated as a partnership for U.S.
Federal tax purposes as of the close of business on Date 1, prepared Form 7004 for
Entity 2, attaching a statement making an election to establish one or more “mixed
straddle accounts” effective Date 2 and identifying the trading strategy to which the
election was to apply. Accountant 1 was also unaware that, pursuant to section
1.1092(b)-4T(f)(2)(i), the prescribed manner for making this election is on Form 6781,
Gains and Losses from Section 1256 Contracts and Straddles.
PLR-104600-15                                3


        In preparation for filing Entity 2’s Form 1065 for Tax Year 1, Accountant 1, upon
a more thorough review of the purchase agreement and records from Entity 2,
determined that for U.S. Federal tax purposes, Entity 2 terminated as a partnership and
became a disregarded entity as of the close of business for Tax Year 1. Consistent with
its termination as a partnership as of the close of business for Tax Year 1, Entity 2’s
Form 1065 for Tax Year 1 was marked as a final return. Consistent with Entity 2
becoming a disregarded entity as of the close of business for Tax Year 1, and with the
intention to make effective as of Date 3 an election to establish one or more “mixed
straddle accounts” relative to positions held by Entity 2 and the Taxpayer, Accountant 1
filed Form 7004 on behalf of Taxpayer for Tax Year 2, including a statement electing
one or more “mixed straddle accounts” effective Date 3.

                                  LAW AND ANALYSIS

       Section 1.1092(b)-4T(a) of the Regulations generally permits a taxpayer to elect
(in accordance with paragraph (f) of section 1.1092(b)-4T) to establish one or more
“mixed straddle accounts.” Section 1.1092(b)-4T(b) defines a mixed straddle account to
mean an account for determining gains and losses from all positions held as capital
assets in a designated class of activities by the taxpayer at the time the taxpayer elects
to establish a mixed straddle account.

       Section 1.1092(b)-4T(f)(1) of the Regulations generally provides that, except as
otherwise provided, the election to establish one or more mixed straddle accounts for a
taxable year must be made by the due date (without regard to any extensions) of the
taxpayer's income tax return for the immediately preceding taxable year (or part
thereof). Section 1.1092(b)-4T(f)(1) further provides that if an election is made after the
time specified above, the election will be permitted only if the Commissioner concludes
that the taxpayer had reasonable cause for failing to make a timely election. Because
section 1.1092(b)-4T(f)(1) provides specific guidance about making a late mixed
straddle account election, the rules generally applicable to late elections described in
section 301.9100-3 do not apply to this late mixed straddle account election.

                                      CONCLUSION

        Based on the facts and representations submitted, we conclude that Taxpayer
has shown reasonable cause for failing to make proper timely elections under section
1.1092(b)-4T(f) of the Regulations. Therefore, we grant the requests for extensions of
time to make the elections under section 1.1092(b)-4T(a) effective for Date 2 and
effective for Date 3.

      Except as specifically ruled upon above, 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
PLR-104600-15                                   4

existing at the time of or effects resulting from the transaction. Specifically, no opinion
is expressed as to the status of whether Taxpayer substantially complied with section
1.1092(b)-4T(f)(2)(i) by the manner in which they attempted to make an election. Also,
no opinion is expressed concerning whether the positions designated by Taxpayer as
the class of activities is a permissible designation under section 1.1092(b)-4T(b)(2) of
the Regulations.

       This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
of the Code provides that it may not be used or cited as precedent.

        In accordance with the terms of a power of attorney on file in this office, copies of
this letter are being sent to your authorized representatives.


                                   Sincerely,


                                   John W. Rogers III
                                   Senior Technician Reviewer, Branch 6
                                   Office of the Associate Chief Counsel
                                   (Financial Institutions and Products)


Enclosures:
      Copy of this letter
      Copy for 6110 purposes