IRS denies a day-trader's request to make a late mark-to-market election, citing hindsight

Plain-English summary

A securities trader wanted to elect the "mark-to-market" method of accounting under Internal Revenue Code § 475(f), which lets a trader in securities treat trading gains and losses as ordinary (rather than capital), so that losses can offset other ordinary income. The election has a strict deadline: it must be made by the due date of the return for the year before the election is to take effect. The taxpayer (an LLC through which a husband day-traded) missed that deadline, apparently believing trading losses would automatically be ordinary and could be carried back against prior-year gains, and only learned about the § 475(f) election later, after engaging a law firm. It then asked the IRS for late-election relief under Treasury Regulation § 301.9100-3. The IRS denied the request. To get relief, a taxpayer must show it acted reasonably and in good faith and that relief would not prejudice the government, and neither test was met here. Because the taxpayer kept trading and asked for the election only after it could see its actual trading results, the request was tainted by "hindsight," and it offered no strong proof otherwise. Separately, a late § 475(f) election is an accounting-method change requiring a § 481(a) adjustment, so the regulations treat the government's interests as prejudiced absent unusual and compelling circumstances, which the taxpayer did not show. This is a useful example of when § 9100 relief is refused: the mark-to-market election cannot be made after the fact once a trader knows whether the year produced gains or losses.

Ruling snapshot

• Question: May a securities trader who missed the deadline get an extension of time under § 301.9100-3 to make a late § 475(f) mark-to-market election?
• Outcome: denied (taxpayer did not act reasonably and in good faith because of hindsight, and relief would prejudice the government under the accounting-method/§ 481(a) rules)
• Key authorities: IRC §§ 475(f), 481(a), 446, 7805(d); Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 99-17; Rev. Proc. 2015-13; Rev. Proc. 2018-31

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202150001 Third Party Communication: None
Release Date: 12/17/2021 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:B3
PLR-104092-21
Date:
August 04, 2021

LEGEND:

Husband = ------------------------

Wife = ------------------------------

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

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

Law Firm = -------------------------------------------

State = -----------

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

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

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

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

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

Year 1 = -------

Year 2 = -------

y = ---

z = ---

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

   This letter responds to a request for a private letter ruling that Husband filed on

behalf of Taxpayer with the Internal Revenue Service (Service). Taxpayer's letter
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 ("the Code"), effective for the Year 1 taxable
year, or in the alternative the Year 2 taxable year. Taxpayer requested relief on Date 1.

                                         FACTS

  Husband and Wife filed joint federal income tax returns for Year 1 and Year 2.

Wife does not have a separate trade or business and was not employed during Year 1
or Year 2. Husband and Wife use a calendar year as their taxable year.

     Husband worked for a large operator and manager -- ------------------------------------

-------------------- ----------- --------------------------------------------. Husband entered into
several joint ventures that owned and operated -------------------- -----------. Husband was
responsible for managing the business operations of these facilities.

   In late Year 1, certain -------------------- ----------- were sold, which resulted in

Husband recognizing gain under § 1231 of the Code. Husband used his share of the
sales proceeds to fund two investment accounts. One account was held in Husband's
name. The other account was held in the name of Taxpayer. Taxpayer was formed on
Date 2. Taxpayer is a State limited liability corporation treated as a partnership for
federal income tax purposes. Taxpayer uses a calendar year as its taxable year.
Taxpayer is owned by Husband and Company. Taxpayer represents that pursuant to a
partnership agreement all items attributable to Taxpayer's trading activities are allocated
to Husband. Taxpayer represents that Husband became a day-trader in late Year 1.
Taxpayer represents that Husband engaged in trading activity on behalf of Husband
and Wife, and through and on behalf of Taxpayer, from late Year 1 through Year 2.

    Taxpayer represents that Husband believed that gain or loss from the trading

activities would be treated as ordinary gain or loss. Specifically, Taxpayer represents
that Husband believed that losses from his trading activities in Year 2 could be carried
back as ordinary losses to Year 1 to offset the § 1231 gains in Year 1. Taxpayer
represents that Husband was unaware of the mark to market election under § 475(f).
Taxpayer engaged the services of Law Firm in Date 3. Taxpayer represents, that at this
time, Husband became aware of the § 475(f) election requirement and of the procedure
supporting a request on behalf of Taxpayer to make a late § 475(f) election.

                                      LAW AND ANALYSIS

   Taxpayer is not entitled to relief under § 301.9100 to make a late § 475(f)(1)

election for Year 1 or Year 2, because Taxpayer 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, sets forth the requirements for making an

election under § 475(f). Under section 5.03 of that revenue procedure, a taxpayer must
file an 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 sets
forth 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 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 the
taxpayer's method of accounting to comply with the election, then the taxpayer is on an
impermissible method.

   Section 6.01 of Rev. Proc. 99-17¹ provides 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 promulgated thereunder apply. Section 6.03 of Rev. Proc.
99-17 generally provides 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 24.01 of Rev. Proc. 2018-31, 2018-22 I.R.B. 637, provides procedures

for a trader in securities that has made a § 475(f)(1) election to obtain automatic
consent of the Commissioner to change the trader's method of accounting for securities
to use the mark-to-market method of accounting under § 475.² Section 24.01(4) of
Rev. Proc. 2018-31 refers to section 5 of Rev. Proc. 99-17 for the requirements to make
¹ Section 6 of Rev. Proc. 99-17 was superseded by Rev. Proc. 99-49, 1999-2 C.B. 725.
² Rev. Proc. 2018-31 is the automatic method change revenue procedure that would have applied to
Taxpayer's election filing, had it been timely filed.
a § 475(f)(1) election.

   Rev. Proc. 2015-13, 2015-5 I.R.B. 419, sets forth 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. 2018-31.
Under section 7.02 of Rev. Proc. 2015-13, unless otherwise provided in a specific
change listed in Rev. Proc. 2018-31, 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.
2018-31 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 sufficient evidence to establish to the satisfaction of the Commissioner that the
taxpayer acted reasonably and in good faith, and that 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

determining 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 1 or Year 2, Taxpayer had to make

the § 475(f)(1) election by Date 4 for Year 1, or by Date 5 for Year 2. Date 4 and Date 5
are the respective due dates of Taxpayer's federal income tax returns (without regard to
extensions) for each taxable year immediately preceding Year 1 and Year 2.
Taxpayer's request for relief under § 301.9100-3 was not made until Date 1. Taxpayer's
request for a late filing of the § 475(f)(1) election was made with the benefit of y months
of hindsight for Year 1, and z months for Year 2. Husband continued to trade during
late Year 1 and Year 2. Taxpayer gained a benefit from hindsight because Taxpayer
was able to determine the effect of a § 475(f)(1) election with the benefit of knowing
Husband's trading results for Year 1 and Year 2. Moreover, Taxpayer failed to provide
strong proof showing that its decision to seek relief to make a late election did not
involve hindsight. Accordingly, under § 301.9100-3(b)(3), Taxpayer is 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). Taxpayer has not presented unusual and
compelling circumstances for its failure to timely make a § 475(f)(1) election.

   Since a § 475(f)(1) election is an accounting method regulatory election that

requires a § 481(a) adjustment, the interests of the Government are deemed to be
prejudiced because Taxpayer has failed to present unusual and compelling
circumstances to justify granting the requested relief.

                                  CONCLUSION

   Based on the facts and representations submitted, we conclude that Taxpayer

has not satisfied the requirements to justify granting an extension of time under
§ 301.9100-3 to make an election under § 475(f)(1) to use the mark-to-market method
of accounting effective for the Year 1 taxable year, or in the alternative the Year 2
taxable year. Specifically, Taxpayer has failed to demonstrate that Taxpayer acted
reasonably and in good faith, and that granting relief will not prejudice the interests of
the Government. Accordingly, Taxpayer's request for an extension of time to make an
election under § 475(f)(1) for Year 1, or in the alternative for Year 2, is denied.

    Except as expressly provided herein, no opinion is expressed or implied

concerning the federal income tax consequences of the transactions described above.
In particular, no opinion is expressed or implied as to whether Taxpayer's securities
trading activities constitute those of a trader in securities eligible to make the mark-to-
market election under § 475(f)(1).

   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, a copy of

this letter is being sent to your authorized representatives.

                                              Sincerely,


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

Enclosures:

Copy of this letter
Copy for section 6110 purposes

cc: