IRS denies a late mark-to-market (section 475(f)) election because the trader relied on hindsight

Plain-English summary

An individual who traded securities wanted to make a "mark-to-market" election under section 475(f)(1). That election lets a qualifying trader treat gains and losses as ordinary and value positions at year-end, which can turn trading losses into fully deductible ordinary losses. The catch is timing: the election must be filed by the unextended due date of the prior year's return. This trader did not know the election existed until later (after seeing news about the CARES Act and net operating loss changes) and only then realized it would have helped, so the trader asked the IRS for "9100" relief to file it late. The IRS denied the request. Because the trader waited past the deadline and could see how the trades actually turned out before deciding, the request relied on hindsight, so the trader is treated as not having acted reasonably and in good faith. On top of that, a section 475(f) election is an accounting-method change that requires a section 481(a) adjustment, and for that kind of election the government's interests are deemed prejudiced unless the taxpayer shows unusual and compelling circumstances, which this trader did not. The IRS expressed no view on whether the trader even qualified as a trader eligible to make the election.

Ruling snapshot

• Question: Should the taxpayer get a late-election extension under § 301.9100-3 to make a § 475(f)(1) mark-to-market election?
• Outcome: Denied
• Key authorities: IRC § 475(f)(1); Treas. Reg. § 301.9100-3(b)(3) and (c)(2); IRC § 481(a); Rev. Proc. 99-17

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202325003 Third Party Communication: None
Release Date: 6/23/2023 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
In Re: PLR-118417-22
---------------------------------------------- Date:
March 27, 2023

LEGEND:

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

Year 1 = -------

Year 2 = -------

Year 3 = -------

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

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

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

a = ---

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

   This letter responds to a request for a private letter ruling Taxpayer filed with the

Internal Revenue Service (Service) on Date 3. Taxpayer's letter requested an
extension of time under § 301.9100 of the Procedure and Administration Regulations
("the 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 taxable
year that ended Date 1.

                                            FACTS

   Taxpayer is an individual and has engaged in securities trading. Taxpayer states

that Taxpayer was not familiar with tax aspects of securities trading and was not aware
that Taxpayer's trading activity during Year 2 might have enabled Taxpayer to claim that
Taxpayer was a trader eligible to make a § 475(f)(1) election.1

   To make a timely § 475(f)(1) election for Year 2, Taxpayer had to make the

§ 475(f)(1) election by Date 2, the unextended due date of Taxpayer's federal income
tax return for Year 1. Taxpayer continued to engage in securities trading after Date 2
and asserts that Taxpayer learned about the existence of a § 475(f)(1) election during
Year 3 by seeing news about the CARES Act and net operating loss (NOL) extensions.
At that time Taxpayer realized that it would have been beneficial for Taxpayer to have
made a § 475(f)(1) election with a Year 2 effective date. However, Taxpayer did not file
the request for an extension of time under § 301.9100-3 to make a late § 475(f)(1)
election for Year 2 until Date 3.

                                   LAW AND ANALYSIS

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

election 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 exclusive procedures for a

taxpayer who is a trader in securities to make an election under § 475(f) to apply the
mark-to-market method of accounting. 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

1 Based on the information supplied by Taxpayer, whether Taxpayer's trading activity during Year 2 was
sufficiently regular, frequent, and continuous for Taxpayer to have been considered engaged in the trade
or business of being a trader in securities for purposes of § 475(f)(1) may be an issue.

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. 99-172 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 Income Tax 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.

   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 listed in Rev. Proc.
2019-43, 2019-48 I.R.B. 1107. Section 24.01 of Rev. Proc. 2019-43 includes in the List
of Automatic Changes to which the automatic change procedures in Rev. Proc. 2015-13
apply a request for a trader in securities that has made a § 475(f)(1) election to change
the trader's method of accounting for securities to use the mark-to-market method of
accounting under § 475.3 Section 24.01(4) of Rev. Proc. 2019-43 refers to section 5 of
Rev. Proc. 99-17 for the requirements to make a § 475(f)(1) election.

   Under section 7.02 of Rev. Proc. 2015-13, unless otherwise provided in a

specific change listed in Rev. Proc. 2019-43, 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 24.01 of Rev. Proc.
2019-43 does not contain an exception to the rule in section 7.02 of Rev. Proc. 2015-13.
Accordingly, the change in method of accounting as a result of a § 475(f)(1) election to
use the mark-to-market method of accounting is made with a § 481(a) adjustment.

   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.

2 Section 6 of Rev. Proc. 99-17 was superseded by Rev. Proc. 99-49, 1999-2 C.B. 725.
3 Rev. Proc. 2019-43 was the automatic method change revenue procedure that applied to the year that
Taxpayer's election would have been effective, had it been timely filed.

   Section 301.9100-3 sets forth rules that the Commissioner must use to determine

whether the Commissioner 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) Taxpayer 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 the taxable year that ended Date 1,

Taxpayer would have had to make the election by Date 2, the unextended due date of
Taxpayer's Year 1 federal income tax return. Taxpayer's request for a late filing of the
§ 475(f)(1) election was not made until Date 3. This late filing provided Taxpayer the
benefit of over a months of hindsight to review and consider the results of Taxpayer's
securities trading transactions and to determine whether Taxpayer would have
benefited by making the election. Accordingly, if Taxpayer had made a timely § 475(f)
election, Taxpayer would not have had the benefit of knowing the results of Taxpayer's
securities transactions after the election's due date, and Taxpayer would not have had
this time to act on that knowledge.

   As a result, Taxpayer gained a benefit from hindsight because Taxpayer was

able to determine the effect of making a § 475(f)(1) election beginning with Year 2,
armed with the benefit of knowing the results of Taxpayer's securities trading activities
for over a months following the due date for making the election. Moreover, Taxpayer
did not provide strong proof showing that Taxpayer's decision to seek relief to make a
late election did not involve hindsight.4 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 taxable year that ended Date 1. Specifically, Taxpayer

4 Taxpayer submitted some federal income tax return information and other documents depicting
Taxpayer's trading activity both before and after the due date for the election, but Taxpayer did not offer
clear factual proof showing that Taxpayer's decision to seek relief to make a late election did not involve
hindsight. Nevertheless, Taxpayer asserts that Taxpayer would have timely made the election even
without knowledge of the factual developments that made the election advantageous.

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) to use
the mark-to-market method of accounting for the taxable year that ended Date 1 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 election
under § 475(f)(1) to use the mark-to-market method of accounting.

   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.

                                                           Sincerely,

                                                           ______________________________
                                                           Jason D. Kristall
                                                           Branch Chief, Branch 3
                                                           Office of the Associate Chief Counsel
                                                           (Financial Institutions & Products)

Enclosures:

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