Late trader mark-to-market election denied because hindsight created an advantage

Plain-English summary

Married taxpayers asked for extra time to elect the section 475(f) mark-to-market method for the husband's securities trading activity. They filed the election months after its due date, after a partnership investment and later options trading had produced substantial losses. The IRS found that the delay gave them hindsight about whether the election would be advantageous and that they did not provide strong proof that their request was free from hindsight. It also concluded that the election was an accounting-method election requiring a section 481(a) adjustment, even if their particular adjustment was zero, so relief would prejudice the government's interests absent unusual and compelling circumstances. The IRS denied the extension and did not decide whether the husband's activity qualified as a securities-trading business.

Ruling snapshot

• Question: May the taxpayers make a late section 475(f)(1) mark-to-market election for the husband's securities trading?
• Outcome: denied
• Key authorities: IRC §§ 446, 475(f), 481(a), and 7805(d); Treas. Reg. §§ 301.9100-1 and 301.9100-3; Rev. Proc. 99-17

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 202009013                                                 Third Party Communication: None
Release Date: 2/28/2020                                           Date of Communication: Not Applicable
Index Number: 475.08-00, 9100.00-00,
              9100.10-01                                          Person To Contact:
                                                                  --------------------, ID No. -----------------
-------------------------------------------------------           Telephone Number:
------------------------                                          --------------------
--------------------------------------------------                Refer Reply To:
                                                                  CC:FIP:B03
                                                                  PLR-111852-19
                                                                  Date:
                                                                  November 15, 2019




Legend

Taxpayers:                 -------------------------------------------------------------------------

Husband:                   ------------------------------------------------------------------------

Wife:                      ---------------------------------------- ---------------------------

Partnership:                                 -------------------------------------------------------------

Year 1:                    -------------------------

Year 2:                    -------------------------

Year 3:                    -------------------------

Month 1:                                     ------------

Month 2:                                     --------

Date 1:                    ------------------------------------

Date 2:                                      -------------------

Date 3:                    -----------------------------------------

Date 4:                                      -------------------

Date 5:                    -------------------------------------
PLR-111852-19

Date 6:                  -------------------------------------

a:                                         ---

b:                                         -------------

c:                       ---------------------------

d:                                         ---

e:                                         ---


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

       This letter responds to a request for a private letter ruling that Taxpayers filed
with the Internal Revenue Service. Taxpayers’ letter, and subsequent submissions,
requested an extension of time under § 301.9100 of the Procedure and Administration
Regulations to make an election to use the mark-to-market method of accounting under
§ 475(f)(1) of the Internal Revenue Code, effective for the taxable year that ended
calendar year end, Year 2. Taxpayers’ request was filed with our office on Date 1.

                                                       Facts

       Taxpayers, a married couple referred to individually as Husband and Wife, filed
on Date 2 a self-prepared joint federal income tax return for Year 2 (Year 2 Return) on
which they reported that Husband was engaged in a securities trading business. At the
end of Year 1, Taxpayers closed all of their open trading positions.

       Husband currently works full time as the treasurer of an investment trust fund
company and had previously served as a tax director of a financial services company.
Husband has an accounting degree as well as a law degree, along with a years of tax
experience in the financial services sector. Wife is currently employed as a teacher

       During Year 1 and Year 2 Husband generally traded in options. By Date 3,
Taxpayers claim to have suffered losses totaling $b from an investment in Partnership,
an exchange traded fund, that was treated as a partnership for federal income tax
purposes. Partnership held volatility-based futures contracts. After incurring these
losses, Husband continued to trade options for the remainder of Year 2, producing
additional losses of approximately $c.

        Taxpayers represent that shortly after suffering the claimed loss of $b from the
investment in Partnership in early Year 2, Husband concluded that his securities trading
activity was a trade or business for which a § 475(f)(1) election could be made.



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PLR-111852-19

Taxpayers represent that they intended to make a mark-to-market election for Year 2.
However, Taxpayers failed to make a timely § 475(f)(1) election, which was due by the
due date of the federal income tax return for the taxable year preceding the year of
change, without regard to extensions. In this case the election for Year 2 was due on
Date 4. Husband asserts that he mistakenly assumed that the election could be made
on their Year 2 Return. Husband claims he was unaware that the election had to be
made by the due date (without regard to any extension) of the tax return for the taxable
year preceding the year of change. Husband states that he did not discover this error
until Year 3, when he began preparing Taxpayers’ Year 2 Return.

       On Date 5, Taxpayers filed a § 475(f)(1) election statement for the Year 2 tax
year with Taxpayers' timely filed Year 2 Return (however, the election statement was d
months too late by this time). Taxpayers reported gains and losses on a mark-to-
market method on their Year 2 Return. Taxpayers also filed a Form 3115, Application
for Change in Accounting Method, on Date 6. Taxpayers’ request for an extension of
time to make the § 475(f)(1) election under § 301.9100 was filed e months after the due
date for filing the § 475(f)(1) election.

                                    Law and Analysis


       Taxpayers are not entitled to § 301.9100 relief to make a late § 475(f)(1) election
because Taxpayers did not act reasonably and in good faith and granting relief would
prejudice the interests of the Government.

       Relief under § 301.9100 to make a late § 475(f)(1) election is denied

       Section 475(f)(1) provides that a taxpayer engaged in a trade or business as a
trader in securities may elect to apply the mark-to-market method of accounting to
securities held in connection with such trade or business. 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.

         Rev. Proc. 99-17, 1999-1 C.B. 503, provides the requirements for making an
election under § 475(f). Under section 5.03 of that revenue procedure, a taxpayer must
file its election statement not later than the due date (without regard to any extension) of
the original federal income tax return for the taxable year immediately preceding the
election year and must attach the statement either to that return or, if applicable, to a
request for an extension of time to file that return. Section 5.04 of Rev. Proc. 99-17
provides the requirements for the statement. The statement must describe the election
being made, the first taxable year for which the election is effective, and, in the case of
an election under § 475(f), the trade or business for which the election is made. Section
4 of Rev. Proc. 99-17 provides that an election under § 475(f) determines the method of
accounting that an electing taxpayer is required to use for federal income tax purposes



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PLR-111852-19

for securities subject to the election. Once a valid election is made, the taxpayer is
required to use a mark-to-market method of accounting under § 475. Section 4 of Rev.
Proc. 99-17 also provides that if a taxpayer fails to change its method of accounting to
comply with the election, then taxpayer is on an impermissible method.

       Section 6.01 of Rev. Proc. 99-171 provided that a change in a taxpayer’s method
of accounting is a change in method of accounting to which the provisions of §§ 446
and 481 and the regulations thereunder apply. Section 6.03 of Rev. Proc. 99-17
generally provided that if a taxpayer changes its method of accounting under section
6.01 of Rev. Proc. 99-17, the taxpayer must take into account the net amount of the
§ 481(a) adjustment over the applicable period.

        Section 23.01 of Rev. Proc. 2017-30, 2017-18 I.R.B. 1131, provides procedures
for a trader in securities that has made a § 475(f)(1) election to obtain automatic
consent of the Commissioner to change its method of accounting for securities to use
the mark-to-market method of accounting under § 475.2 Section 23.01(4) of Rev. Proc.
2017-30 refers to section 5 of Rev. Proc. 99-17 for the requirements to make a
§ 475(f)(1) election.

        Rev. Proc. 2015-13, 2015-5 I.R.B. 419, provides the general procedures under
§ 446(e) to obtain the consent of the Commissioner to change a method of accounting
for federal income tax purposes, including the procedures to obtain the automatic
consent of the Commissioner to change a method of accounting in Rev. Proc. 2017-30.
Under section 7.02 of Rev. Proc. 2015-13, unless otherwise provided in a specific
change listed in Rev. Proc. 2017-30, a taxpayer making a change in method of
accounting must apply § 481(a) and take into account the § 481(a) adjustment in the
manner provided in section 7.03 of Rev. Proc. 2015-13. Section 23.01 of Rev. Proc.
2017-30 does not contain an exception to the rule in section 7.02 of Rev. Proc. 2015-13.

       Section 301.9100-1(c) provides, in part, that the Commissioner has discretion to
grant a reasonable extension of time to make a regulatory election (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). Section 301.9100-1(b)
defines the term election to include a request to change an accounting method.

       Section 301.9100-3 sets forth rules that the Commissioner must use to determine
whether it will grant an extension of time for regulatory elections that do not meet the
requirements of § 301.9100-2 for an automatic extension. Generally, a taxpayer must
provide the evidence to establish to the satisfaction of the Commissioner that the


1 Section 6 of Rev. Proc. 99-17 was superseded by Rev. Proc. 99-49, 1999-2 C.B. 725.
2 Rev. Proc. 2017-30 was the automatic method change revenue procedure that would have applied to

Taxpayers' filing had it been timely filed.



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PLR-111852-19

taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the
interests of the Government.

       Except as provided in § 301.9100-3(b)(3), § 301.9100-3(b)(1) provides rules for
when a taxpayer is deemed to have acted reasonably and in good faith. Section
301.9100-3(b)(1)(i) provides that a taxpayer will be deemed to have acted reasonably
and in good faith if the taxpayer requests relief under § 301.9100-3 before the failure to
make the regulatory election is discovered by the Service. Section 301.9100-3(b)(3)
provides rules as to when a taxpayer is deemed to have not acted reasonably and in
good faith. Section 301.9100-3(b)(3)(iii) provides that a taxpayer is deemed to have not
acted reasonably and in good faith if specific facts have changed since the due date for
making the election that make the election advantageous to a taxpayer. 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) provides that the Commissioner will grant a reasonable
extension of time to make a regulatory election only when the interests of the
Government will not be prejudiced by the granting of relief. Section 301.9100-3(c)(1)(i)
provides that the interests of the Government are prejudiced if granting relief would
result in a taxpayer having a lower tax liability in the aggregate for all taxable years
affected by the election 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(c)(2) provides special rules for accounting method regulatory
elections. Section 301.9100-3(c)(2)(ii) provides that the interests of the Government are
deemed to be prejudiced except in unusual and compelling circumstances if the
accounting method regulatory election for which relief is requested requires an
adjustment under § 481(a) (or would require an adjustment under § 481(a) if 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).

       a) Taxpayers did not act reasonably and in good faith

       Section 301.9100-3(b)(3)(iii) provides that a taxpayer is deemed to have not
acted reasonably and in good faith if specific facts have changed since the due date for
making the election that make the election advantageous to a taxpayer. 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.

        To make a timely § 475(f)(1) election for Year 2, Taxpayers had to make the
§ 475(f)(1) election by the unextended due date of their tax return for Year 1.
Taxpayers did not file their request for relief under § 301.9100-3 until Date 1. The late
filing provided Taxpayers the benefit of e months of hindsight. During that time,
Husband continued to trade in options. Taxpayers gained advantage from that



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PLR-111852-19

hindsight because Taxpayers were able to determine the effect of a § 475(f)(1) election
with knowledge that Husband’s ongoing options trading (a) produced additional losses
of approximately $c, and (b) did not produce meaningful gain to absorb capital losses
from Taxpayers’ claimed loss of $b from their investment in Partnership. Taxpayers
have failed to provide strong proof that specific facts have not changed since the due
date for making the election that make the election advantageous to Taxpayers.
Accordingly, under § 301.9100-3(b)(3), Taxpayers are deemed to have not acted
reasonably and in good faith.

        b) Granting Relief Would Prejudice the Interests of the Government

       Under § 301.9100-3(c)(2)(ii), the interests of the Government are deemed to be
prejudiced, except in unusual and compelling circumstances, if the accounting method
regulatory election for which relief is requested requires an adjustment under § 481(a)
(or would require an adjustment under § 481(a) if 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). Taxpayers have not presented unusual and
compelling circumstances, but they instead argue that their accounting method
regulatory election is not one that requires an adjustment under § 481(a) because their
§ 481(a) adjustment amount is zero. The § 481(a) adjustment is reported by Taxpayers
to be zero because they disposed of all their securities prior to their Year 1 taxable year
end.

       Taxpayer’s argument is misplaced. 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.
Because the election is integrally related to the change in accounting method to use the
mark-to-market method of accounting under § 475, it is an accounting method
regulatory election subject to § 301.9100-3(c)(2). Further, a § 475(f)(1) election
requires a change in method of accounting that requires a § 481(a) adjustment. The
change is not permitted to be implemented on a cut-off method.3

       Since a § 475(f)(1) election is an accounting method regulatory election to which
§ 481(a) applies, the interests of the Government are deemed to be prejudiced given
that Taxpayers have failed to present unusual and compelling circumstances to justify
granting the requested relief.

                                             CONCLUSION


3 Example 4 of § 301.9100-3(f) demonstrates that the language in § 301.9100-3(c)(2)(ii) does not apply to

accounting method changes that are required to be made on a cut-off basis. By contrast, Example 5 of
§ 301.9100-3(f) illustrates that the interests of the Government are deemed to be prejudiced under
§ 301.9100-3(c)(2)(ii) if the facts are varied such that a cut-off method is not permitted for the accounting
method change.



                                                    6
PLR-111852-19

       Based on the facts and representations submitted, we conclude that Taxpayers
have not satisfied the requirements to justify granting an extension of time to make an
election under § 475(f) to use the mark-to-market method of accounting. Specifically,
Taxpayers have failed to demonstrate that they acted reasonably and in good faith, and
that the grant of relief will not prejudice the interests of the Government. Accordingly,
Taxpayers' request for an extension of time to make the § 475(f)(1) election for Year 2 is
denied.

        Except as expressly provided herein, no opinion is expressed or implied
concerning the federal tax consequences of the transactions described above.
Additionally, no opinion is expressed or implied as to whether Husband's trading
activities constitute those of a trader in securities eligible to make the mark-to-market
election under § 475(f)(1).4

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


                                            Sincerely,


                                            Patrick E. White
                                            Senior Counsel, Branch 3
                                            Office of the Associate Chief Counsel
                                            (Financial Institutions and Products)


Enclosures
     Copy of this letter
     Copy for section 6110 purposes



cc:




4 Based on information supplied by Taxpayers, however, there appears to be an issue as to whether

Husband’s trading activity was sufficiently regular, frequent and continuous for Husband to have been
considered engaged in the business of a trader in securities under § 475(f)(1).



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