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:
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Telephone Number:
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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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