Late commodities mark-to-market elections received relief

Plain-English summary

An entity had long used section 475 mark-to-market accounting for commodities while treated as disregarded. A retroactive entity-classification election made it a new corporate taxpayer, but its advisers inadvertently overlooked the need for new section 475(e) and (f) elections within the new taxpayer's filing period. The IRS found that the taxpayer was not changing a prior return position, had not deliberately skipped the elections, and did not use hindsight. Because it already used mark-to-market accounting, granting relief would not lower its tax liability or create a section 481 adjustment, and the relevant years remained open. The IRS granted 90 days to complete the election requirements under Revenue Procedure 99-17.

Ruling snapshot

• Question: Could the new corporate taxpayer make late section 475(e) and (f) mark-to-market elections?
• Outcome: Approved, with a 90-day filing period
• Key authorities: IRC § 475; Treas. Reg. § 301.9100-3; Rev. Procs. 99-17, 2015-13, and 2015-14

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201623005                                               Third Party Communication: None
Release Date: 6/3/2016                                          Date of Communication: Not Applicable
Index Numbers: 9100.00-00, 475.06-00,
              475.07-00                                         Person To Contact:
                                                                --------------, ID No. ----------------
---------------------                                           Telephone Number:
-------------------------------                                 --------------------
--------------------------------------                          Refer Reply To:
--------------------------                                      CC:FIP:B03
 -------------------------------                                PLR-129697-15
                                                                Date:
                                                                February 22, 2016




Legend:

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

Entity A          =        -----------------------------------------------------------------------

Entity B          =        ---------------------------------.

Parent            =        --------------------------------------

Country           =        --------------------------

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

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

Date 3            =        ------------------

Date 4            =        ---------------------

Date 5            =        --------------------------------

Date 6            =        --------------------



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

      This responds to a letter dated August 19, 2015, and subsequent
correspondence submitted on behalf of Taxpayer, requesting that the Internal Revenue
Service (“Service”) grant Taxpayer an extension of time under § 301.9100-3 of the
PLR-129697-15                                  2

Procedure and Administration Regulations to elect the use of the mark-to-market
method of accounting under Internal Revenue Code (“Code”) sections 475(e) and (f).

                                           FACTS

       On Date 1, Entity A acquired from an unrelated party all of the outstanding equity
interests in Taxpayer, an entity formed under the laws of Country. At the time of the
transaction, Entity B was the parent entity of Entity A. On Date 2, Parent acquired all of
the shares of Entity B. Taxpayer was treated as a disregarded entity for U.S. federal tax
purposes from the time of its acquisition by Entity A on Date 1 until Date 3, the effective
date of an election that was made to treat Taxpayer as a corporation for U.S. federal tax
purposes.

       Taxpayer made section 475(e) and (f) elections effective as of Date 4 and has
used the mark-to-market method of accounting for U.S. federal tax purposes with
respect to its positions in commodities (within the meaning of section 475(e)(2)). When
the election was made to treat Taxpayer as a corporation for U.S. federal tax purposes,
Taxpayer became a new taxpayer for U.S. federal income tax purposes. Thus,
Taxpayer was required to timely make new section 475(e) and (f) elections to be able to
continue to properly use the mark-to-market method of accounting for its positions in
commodities.

        When the decision was made during Date 5 to elect to treat Taxpayer as a
corporation for U.S. federal tax purposes, it was also decided that the effective date of
that election would be made retroactive to Date 3, 75 days before the date the Form
8832, Entity Classification Election, was filed on Taxpayer’s behalf. Inadvertently, the
need to make new section 475(e) and (f) elections for Taxpayer within 75 days of the
first day on which Taxpayer was treated as a corporation for U.S. federal tax purposes
was not considered at the time the decision to treat Taxpayer as a corporation was
made. On Date 6, the inadvertent oversight was discovered by employees of Parent,
and they began preparing the request for relief under § 301.9100-3.

                                   LAW AND ANALYSIS

          Under § 301.7701-3(g)(1)(iv), if an eligible entity that is disregarded as an entity
separate from its owner elects under § 301.7701-3(c)(1)(i) to be classified as an
association, the owner of the eligible entity is deemed to contribute all of the assets and
liabilities of the entity to the association in exchange for stock of the association.
Therefore, when Taxpayer made the election to be treated as a corporation for U.S.
federal tax purposes, it was treated as a new taxpayer for U.S. federal income tax
purposes starting on Date 3.

      Because Taxpayer will be treated as a new taxpayer, it is requesting permission
to make late elections to adopt a method of accounting for commodities under sections
PLR-129697-15                                3

475(e) and (f) rather than late elections to change its method of accounting for
commodities.

       Section 475(e) provides that a dealer in commodities may elect to apply the
mark-to-market method of accounting to commodities held by such dealer. Section
475(f) provides that a taxpayer engaged in a trade or business as a trader in
commodities may elect to apply the mark-to-market method of accounting to
commodities held in connection with such trade or business. See section 475(f)(1) and
(2). 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. 2015-13, 2015-5 I.R.B. 419, in
conjunction with Rev. Proc. 2015-14, 2015-5 I.R.B. 450). Rev. Proc. 99-17 provides the
exclusive procedure for dealers in commodities and traders in securities or commodities
to make an election to use the mark-to-market method of accounting under section
475(e) or (f). This revenue procedure applies both to existing taxpayers who are
changing to the mark-to-market method of accounting for securities or commodities and
to new taxpayers who are adopting that method.

       Section 5.03(2) of Rev. Proc. 99-17 provides, in relevant part, that a new
taxpayer (for which no federal income tax return was required to be filed for the taxable
year immediately preceding the election year) may make an election under section
475(e) or (f) for a tax year beginning on or after January 1, 1999, by placing in its books
and records no later than two months and 15 days from the first day of the election year
a statement that describes 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. To notify
the Service that the election was made, the new taxpayer must attach a copy of the
statement to its original federal income tax return for the election year.

        Section 4 of Rev. Proc. 99-17 provides that the election under section 475(e) or
(f) determines the method of accounting an electing taxpayer is required to use for
federal income tax purposes for securities or commodities subject to the election. A
method of accounting for securities or commodities subject to the election is
impermissible unless the method is in accordance with section 475 and the regulations
thereunder. If an electing taxpayer’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. Thus, a
taxpayer that makes a section 475(e) or (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.
PLR-129697-15                                 4

       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, 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 Code except subtitles E, G, H, and I. A regulatory
election is defined in § 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.

       Sections 301.9100-3(a) through (c)(1)(ii) set forth rules that the 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 for an automatic extension. Section 301.9100-
3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of § 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 § 301.9100-3(c) provides that the interests of the
Government are prejudiced if either 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) or the taxable year in which a timely regulatory
election should have been made is closed.

        Section 301.9100-3(b)(3) describes three situations where a taxpayer is deemed
to have not acted reasonably and in good faith. First, under § 301.9100-3(b)(3)(i), a
taxpayer seeking to alter a return position for which an accuracy-related penalty has
been or could be imposed under section 6662 is not acting reasonably and in good
faith. Second, under § 301.9100-3(b)(3)(ii), a taxpayer who was informed in all material
respects of the required election and the related tax consequences but chose not to
timely file the election is not acting reasonably and in good faith in requesting
permission to make a late election. Third, § 301.9100-3(b)(3)(iii) provides 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 parts, that the interests of the Government
are deemed to be prejudiced by granting an extension of time, except in unusual and
compelling circumstances, in several situations: first, if the accounting method
regulatory election is subject to the procedure described in § 1.446-1(e)(3)(i) (requiring
the advance written consent of the Commissioner) (see § 301.9100-3(c)(2)(i)); second,
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
PLR-129697-15                                 5

the taxpayer changed to the method of accounting for which relief is requested in a
taxable year subsequent to the taxable year the election should have been made) (see
§ 301.9100-3(c)(2)(ii)); third, if the accounting method regulatory election involves
certain changes from an impermissible method of accounting (see § 301.9100-
3(c)(2)(iii)); fourth, if the accounting method regulatory election would provide a more
favorable method of accounting or more favorable terms and conditions if the election is
made by a certain date or taxable year (see § 301.9100-3(c)(2)(iv)).

       As noted above, section 4 of Rev. Proc. 99-17 states that an election under
section 475(e) or (f) determines the method of accounting an electing taxpayer is
required to use for federal income tax purposes for securities or commodities subject to
the election. If an electing taxpayer’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(e) or (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 § 301.9100-3(c)(2).

       Rev. Proc. 2015-13, in conjunction with Rev. Proc. 2015-14, 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(e) or (f) by complying with the
requirements of Rev. Proc. 99-17 and is required to change its method of accounting to
comply with the election. See section 23.01(2)(a) of Rev. Proc. 2015-14.

       Taxpayer requests an extension of time to make accounting method regulatory
elections that are subject to the provisions of § 301.9100-3. Relief under this section of
the Regulations will only be granted when a taxpayer provides evidence satisfactory to
the Commissioner that the taxpayer acted reasonably and in good faith, and the
granting of relief will not prejudice the interests of the Government. If specific facts have
changed since the due date for making the elections that make the elections
advantageous to Taxpayer, § 301.9100-3(b)(3) provides that the Service will grant relief
only when Taxpayer provides strong proof that Taxpayer’s decision to seek relief did not
involve hindsight. Without such proof Taxpayer is deemed to have not acted
reasonably or in good faith.

       As described above, Taxpayer, after making the election to be treated as a
corporation for U.S. federal tax purposes, was treated as a new taxpayer as of Date 3,
the effective date of that election. As such, as of the date of the letter requesting the
extension of time to make section 475(e) and (f) elections, Taxpayer had not filed a prior
U.S. federal income tax return, nor had it taken any position regarding its method of
accounting for commodities. Therefore, because Taxpayer had not filed a prior U.S.
federal income tax return, it is not seeking to alter a prior return position, and
§ 301.9100-3(b)(3)(i) does not apply.
PLR-129697-15                                6

       This is also not a case where Taxpayer simply chose not to make timely
elections under section 475(e) and (f). As described above, when the decision was
made during Date 5 to elect to treat Taxpayer as a corporation for U.S. federal tax
purposes, it was also decided that the effective date of that election would be made
retroactive to Date 3, 75 days before the date the Form 8832, Entity Classification
Election, was filed on Taxpayer’s behalf. Taxpayer has submitted affidavits, signed
under penalties of perjury, from employees of Parent who would have been responsible
for making the elections. These affidavits demonstrate that, at the time the Form 8832
was filed and made effective as of Date 3, Taxpayer was unaware of the need to make
new section 475(e) and (f) elections. Therefore § 301.9100-3(b)(3)(ii) does not apply.

       Further, Taxpayer represents that it made elections to account for commodities
under section 475(e) and (f) that were effective on Date 4. This means that on Date 3,
Taxpayer’s current method of accounting for commodities was, and had been for years,
the section 475 mark-to-market method. Absent Taxpayer’s tax entity classification
change and Taxpayer’s resulting status as a new taxpayer, Taxpayer would have no
need to change its method of accounting for commodities because it was already
accounting for commodities under section 475. Given these facts, Taxpayer’s delay in
making the elections to account for commodities under section 475 did not provide
Taxpayer with any time to review and consider the results of its commodities trading
transactions and whether it would benefit by making the elections because it was
already accounting for commodities under section 475. Based upon these facts,
Taxpayer did not use hindsight when deciding to request permission to make elections
under section 475(e) and (f) and has met the requirements of § 301.9100-3(b)(3)(iii).
Therefore, § 301.9100-3(b)(3) does not apply to Taxpayer.

        Because Taxpayer was already accounting for commodities under section 475,
the change in Taxpayer’s entity classification and its request to make a late adoption of
mark-to-market accounting for commodities under section 475 will not result in a lower
tax liability. Further, we note that the short tax year beginning on Date 3, and all
subsequent tax years, are, as of the date of this letter, not closed by the period of
limitations on assessment under section 6501(a). Therefore, § 301.9100-3(c)(1) is not
applicable.

        As provided for in Rev. Proc. 99-17 and Rev. Proc. 2015-13, in conjunction with
Rev. Proc. 2015-14, advance written consent of the Commissioner is not required to
make an election under 475(e) or (f) assuming all requirements are met. Therefore,
§ 301.9100-3(c)(2)(i) does not apply. Further, Taxpayer, after making the entity
classification election change, was a new taxpayer. Thus, Taxpayer did not have a
method of accounting for commodities that it could change, and its adoption of the
section 475 mark-to-market method of accounting for commodities will not generate an
adjustment to income under section 481(a). Therefore, § 301.9100-3(c)(2)(ii) does not
apply.
PLR-129697-15                                7

     Section 301.9100-3(c)(2)(iii) is not applicable because Taxpayer is not seeking to
change from an impermissible method of accounting.

       Finally, because Taxpayer was already accounting for commodities under
section 475, Taxpayer’s request to make a late adoption of the section 475 mark-to-
market method of accounting for commodities will not result in a more favorable method
of accounting or provide for more favorable terms and conditions if the election was
made by a certain date or taxable year. Therefore, § 301.9100-3(c)(2)(iv) does not
apply.

        Based on the facts and representations submitted, and because §§ 301.9100-
3(b)(3), -3(c)(1), and -3(c)(2) do not apply to Taxpayer, we conclude that Taxpayer has
satisfied the requirements for our granting a reasonable extension of time to make
elections under section 475(e) and (f) to adopt the mark-to-market method of
accounting. To make the election, Taxpayer must, within 90 days of the date of this
letter, comply with the requirements of Section 5.03(2) of Rev. Proc. 99-17 and must file
a copy of its election statement, a copy of this letter, and an amended federal income
tax return for the election year, if needed, with the appropriate service center.

       Except as specifically set forth above, no opinion is expressed concerning the
federal tax consequences of the facts described above under any other provision of the
Code. Further, no opinion is expressed as to whether Taxpayer’s elections under
section 475(e) and (f), effective as of Date 4, were timely or proper, or whether
Taxpayer qualifies as a dealer or trader in commodities.

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



                                         Sincerely,



                                         ________________________
                                         K. Scott Brown
                                         Branch Chief, Branch 3
                                         Office of Associate Chief Counsel
                                         (Financial Institutions and Products)


Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes