Hedge fund receives more time for mixed-straddle elections

Plain-English summary

A hedge fund entered mixed-straddle transactions in two tax years but did not timely elect mixed-straddle account treatment. The fund had hired a CPA firm for tax and administration services, but the firm did not explain the election, its timing, or the possibility of late relief despite monitoring the trading activity. After new counsel identified the issue, the fund requested relief under the specific reasonable-cause rule in Treas. Reg. § 1.1092(b)-4T(f). The IRS found reasonable cause and granted 30 days to file the elections for both years.

Ruling snapshot

• Question: Could the hedge fund make late mixed-straddle account elections for two tax years?
• Outcome: Approved, with 30 days to file both elections.
• Key authorities: IRC § 1092(b); Treas. Reg. § 1.1092(b)-4T.

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201639004                                              Third Party Communication: None
Release Date: 9/23/2016                                        Date of Communication: Not Applicable
Index Number: 1092.05-00
                                                               Person To Contact:
--------------------                                           ---------------------, ID No. ------------------
-------------------------------------------                    Telephone Number:
--------------------------------------------                   ----------------------
-------------------------------------------                    Refer Reply To:
--------------------------------------                         CC:FIP:B01
                                                               PLR-103283-16
                                                               Date:
                                                               June 23, 2016




Legend

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

Accounting Firm            =        --------------------------------

Company                    =        --------------------------------------------

State A                    =        --------------

State B                    =        ----------

Year 1                     =        -------

Year 2                     =        -------

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

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

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

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

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

Date 6                     =        -----------------------
PLR-103283-16                                 2


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

        This responds to a letter dated January 11, 2016, submitted on behalf of
Taxpayer by its authorized representatives. Taxpayer requests an extension of time to
file an election under section 1092(b) of the Internal Revenue Code (“Code”) and
section 1.1092(b)-4T(f) of the Temporary Income Tax Regulations (“mixed straddle
election”).

                                          FACTS

       Taxpayer is a State A LLC organized on Date 1 that is treated as a partnership
for federal income tax purposes. Taxpayer uses an accrual method of accounting and
employs the calendar year as its taxable year for federal income tax purposes.

       Taxpayer was created as a hedge fund with the purpose of allocating capital for
both internal traders and external managed accounts. Taxpayer's management team
founded the fund and had significant investment experience but no prior experience
running a strategy directly.

        On Date 2, Taxpayer retained Accounting Firm, a State B CPA firm with
expertise in hedge fund and private equity taxation, to provide both tax and fund
administration services. Accounting Firm was uniquely qualified to assist Taxpayer
because of its hedge fund administration affiliate, Company, an independent provider of
specialized administration services for financial companies such as Taxpayer. Further,
Accounting Firm marketed itself as having hedge fund tax professionals who specialize
in tax issues affecting hedge funds and private equity firms. In retaining Accounting
Firm, Taxpayer intended to rely upon Accounting Firm to provide both administration
services and tax advice in connection with Taxpayer’s trading activities because
Taxpayer was managed by trained investment managers who lacked any tax expertise.

       During the first quarter of Year 1, shortly after Taxpayer was created, Taxpayer
began a new fund and entered into transactions that Taxpayer later learned qualified for
federal income tax purposes as "mixed straddles" under sections 1092 and 1.1092(b)-
4T(b). At the time these transactions started, Taxpayer's managers were unaware of
the availability of tax elections attributable to mixed straddles and their tax implications.
Although Accounting Firm was aware of Taxpayer's trading activities, and monitored
Taxpayer's trading on a daily basis, Accounting Firm failed to advise Taxpayer of the
availability of an election to treat the transaction as "mixed straddles” for federal income
tax purposes. Taxpayer continued the investment strategy from which it entered into
mixed straddle transactions until Date 3, at which time Taxpayer liquidated the
transactions.
PLR-103283-16                                  3

       On Date 4, Taxpayer’s management became aware of the potential availability of
the mixed straddle election when its Accounting Firm accountant asked how Taxpayer
“handles certain elections,” including the mixed straddle election. After the accountant
raised the issue, and Taxpayer learned about the tax implications of making such an
election, Taxpayer expressed to the accountant an interest in making such an election.
In response, the accountant advised that the election should have been made in the
prior year, and, therefore, "it doesn't look like it's an option at this point." At the time of
this communication, Taxpayer had no knowledge of the manner in which the election is
made, that a separate election is required for each mixed straddle account, or that late
election relief is available if a taxpayer has reasonable cause for failure to file the
election. Rather than advise Taxpayer about the manner in which an election is made,
or the availability of late election relief, the accountant discouraged Taxpayer from
making an election, suggesting that it was "a lot of work" and "cost prohibitive" to
recalculate the income under a different methodology.

        On Date 5, Taxpayer began a different investment strategy, and again entered
into transactions that qualified as mixed straddles. Although Accounting Firm was
aware of Taxpayer's investment activity, and that Taxpayer had previously expressed
an interest in making a mixed straddle election, Accounting Firm failed to advise
Taxpayer as to the availability of the election for the new strategy, the manner in which
the election is made, or the time for making the election.

       Taxpayer began interviewing new tax advisers shortly thereafter, based, in part,
on a belief that Accounting Firm was not properly advising them on tax matters,
including the mixed straddle election which Taxpayer believed was irrevocably missed
in Year 1.

        On Date 6, Taxpayer retained counsel who advised Taxpayer that a mixed
straddle election should have been made for Year 1 and Year 2, and that late election
relief for Year 1 and Year 2 may be available due to reasonable cause.

       Consequently, Taxpayer requests an extension of time to file an election under
sections 1092(b) and 1.1092(b)-4T(f) for Year 1 and Year 2.

                                   LAW AND ANALYSIS

       Section 1.1092(b)-4T(a) of the Regulations generally permits a taxpayer to elect
(in accordance with § 1.1092(b)-4T(f)) 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.
PLR-103283-16                                 4

       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 a taxpayer begins trading or
investing in positions in a new class of activities during a taxable year, the taxpayer
must make the election with respect to the new class of activities by the later of the due
date (without regard to any extensions) of the taxpayer's return for the immediately
preceding year or 60 days after the first mixed straddle in the new class of activities is
entered into.

       Section 1.1092(b)-4T(f)(1) also 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 information provided and representations made, we conclude that
Taxpayer has shown reasonable cause for failing to make a timely election under
§ 1.1092(b)-4T(f) for its Year 1 and Year 2 taxable years. Therefore, we grant the
Taxpayer's request for an extension of time to make these elections under § 1.1092(b)-
4T for the taxable years ending December 31, Year 1 and December 31, Year 2. The
extension will expire 30 days from the date of this letter. Each election must be made in
the manner prescribed in § 1.1092(b)-4T(f)(2) and filed with the Director having audit
jurisdiction over the Taxpayer's tax return.

        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
existing at the time of or effects resulting from the transaction. Specifically, no opinion
is expressed concerning whether the positions designated by Taxpayer as the class of
activities is a permissible designation under § 1.1092(b)-4T(b)(2) of the Regulations.

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
PLR-103283-16                                  5


         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representative.


                                       Sincerely,



                                       Robert A. Martin
                                       Senior Technician Reviewer
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)