IRS denies a late mark-to-market election because the trader used hindsight

Plain-English summary

An individual securities trader asked the IRS for extra time to make a late
"mark-to-market" election under section 475(f)(1). That election lets a trader
treat securities gains and losses as ordinary and value open positions at
year-end market prices. Normally it must be made by the unextended due date of
the prior year's return, before the trader knows how the year will turn out. This
taxpayer discovered, well after the deadline, that the wash-sale rules had
disallowed large trading losses and left a taxable gain, and only then tried to
make the election retroactively. The IRS denied the request. Because the taxpayer
waited many months and could see the actual trading results before deciding,
seeking relief used hindsight, which the regulations treat as not acting in good
faith. Separately, a section 475(f) election is an accounting-method change that
requires a section 481(a) adjustment, so relief is presumed to prejudice the
government absent unusual and compelling circumstances, which the taxpayer did
not show. The IRS took no position on whether the taxpayer's activity even
qualified as that of a trader eligible to make the election.

Ruling snapshot

• Question: Should a securities trader get more time to make a late section 475(f)(1) mark-to-market election effective for a prior year?
• Outcome: Denied (request used hindsight and would prejudice the government)
• Key authorities: IRC § 475(f)(1); Treas. Reg. § 301.9100-3(b)(3)(iii), (c)(2)(ii); Rev. Proc. 99-17; IRC § 481(a)

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 202329006                                               Third Party Communication: None
Release Date: 7/21/2023                                         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
                                                                PLR-120645-22
                                                                Date:
                                                                April 25, 2023




LEGEND:

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

Tax Advisor              =        ----------------------------------

Year 1                   =        -------

Year 2                   =        -------

Year 3                   =        -------

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

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

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

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

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

Date 6                   =        ------------------

Date 7                   =        ---------------------
PLR-120645-22                                        2


Date 8                   =    --------------------

Date 9                   =    ------------------

Date 10                  =    -----------------------

Month 1                  =    --------------

a                        =    -----------

b                        =    ---------

c                        =    ---------

d                        =    ---------

e                        =    -----------------

f                        =    ---------------

g                        =    -----------------

h                        =    ---------------

j                        =    --------

k                        =    ---


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

       This letter responds to a request for a private letter ruling Taxpayer filed with the
Internal Revenue Service (“the Service”) on Date 10. Taxpayer’s letter requested an
extension of time under § 301.9100 of the Procedure and Administration Regulations
(“the Regulations”) to make an election under § 475(f)(1) of the Internal Revenue Code
(“the Code”) to use the mark-to-market method of accounting, effective for the taxable
year that ended Date 5.

                                                  FACTS

       Taxpayer is an individual whose work experience has varied. Taxpayer’s regular
and recurring income consists solely of investment income. Taxpayer represents that it
also has engaged in securities trading. The income Taxpayer made in Year 2 included
a of tax-exempt interest, b of taxable interest, and c of dividends, of which d were
PLR-120645-22                                       3

qualified dividends. For Year 2, Taxpayer reported no salaries, wages, tips, etc. or
other business income on the Form 1040, U.S. Individual Income Tax Return.

       During Year 2, Taxpayer realized approximately e of capital losses from
securities trading activity. The vast majority of the losses were realized after Date 1, the
due date for making a mark-to-market election under § 475(f)(1) for Year 2. Further,
Taxpayer represents that in Date 2, after the due date for making a mark-to-market
election under § 475(f)(1) for Year 2, Taxpayer started to employ a strategy for trading
in certain securities. Taxpayer’s strategy worked well until Date 3 or Date 4, at which
point Taxpayer began to incur capital losses. Taxpayer continued to trade and incur
capital losses in those securities through Date 5, and into Date 6. Taxpayer’s
acquisitions of the securities within the wash sale period described in § 1091(a)
triggered the wash sale rules, which disallowed the capital losses incurred by Taxpayer
during Month 1 of Year 2. The application of the wash sale rules caused the disallowed
capital losses incurred during Year 2 to not be applied to offset the aggregate capital
gains incurred in Year 2. Accordingly, Taxpayer reported on Taxpayer’s Year 2 federal
income tax return a capital gain of f.1

       Taxpayer indicates that Taxpayer discovered the wash sale issue when
Taxpayer visited the website of Taxpayer’s brokerage firm on or about Date 7 and saw
the wash sale loss posted in Taxpayer’s brokerage firm account. Taxpayer temporarily
ceased securities trading activities on or about Date 7. During Date 8, Taxpayer
received a Form 1099 from Taxpayer’s brokerage firm for Year 2 detailing and
confirming the large amount of capital gains realized during that year as well as the
substantial amount of capital losses disallowed for that year because of the application
of the wash sale rules.

         Upon receipt of the Year 2 Form 1099, Taxpayer contacted Tax Advisor, a
certified public accountant and Taxpayer’s regular tax advisor for the previous several
years. Taxpayer's customary practice regarding the filing of federal income tax returns
was to forward to Tax Advisor all the information for each taxable year, including the
Forms 1099 related to Taxpayer’s securities trading. Tax Advisor would then prepare
the necessary returns. Taxpayer claims that during the email exchange with Tax
Advisor following Taxpayer’s receipt of the Year 2 Form 1099, Taxpayer learned for the
first time of the possibility of making an election under § 475(f)(1) to use the mark-to-
market method of accounting. Accordingly, Taxpayer indicates that Taxpayer 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 an election under § 475(f)(1) effective
for Year 2.2


1 Taxpayer represents that the wash sale disallowance from Taxpayer’s trading activity was g, and the net

capital gain from Taxpayer’s trading activity, taking into account the wash sale disallowance, was h.
2 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.
PLR-120645-22                               4

        Taxpayer states that although Tax Advisor knew of the extent and nature of
Taxpayer’s securities trading activities, Tax Advisor nevertheless failed to mention to
Taxpayer the possibility of Taxpayer making a timely § 475(f)(1) election for Year 2.
Consequently, Taxpayer asserts that Tax Advisor, being aware of Taxpayer’s tax
situation and securities trading activities, failed to advise Taxpayer properly and
adequately regarding the federal income tax treatment of Taxpayer’s securities trading
activities. In Tax Advisor’s affidavit, however, Tax Advisor states that Tax Advisor was
familiar with the provisions of § 475, including making an election under § 475(f)(1) to
use the mark-to-market method of accounting, but did not discuss the possibility with
Taxpayer of Taxpayer making an election under § 475(f)(1) because Tax Advisor “did
not think [Taxpayer] qualified for said election.”

       To make a timely § 475(f)(1) election for Year 2, Taxpayer had to make the
§ 475(f)(1) election by Date 1, the unextended due date of Taxpayer’s federal income
tax return for Year 1. A significant portion of Taxpayer’s securities trading activities
during Year 2 occurred after Date 1. Indeed, Taxpayer’s brokerage firm statement for
the last month of Year 2 indicates that Taxpayer traded shares in the securities referred
to above more than j times during that period.

        Accordingly, Taxpayer continued to engage in securities trading after Date 1 and
claims that Taxpayer became aware of the existence of a § 475(f)(1) election during
Date 8. At some point during Year 3, after learning of the availability of a § 475(f)(1)
election and the consequences of Taxpayer’s wash sales in Year 2, Taxpayer realized
that it would have been beneficial for Taxpayer to have made a § 475(f)(1) election with
a Year 2 effective date. Taxpayer represents that as a “protective” measure, Taxpayer
made a timely § 475(f)(1) election for Year 3 no later than Date 9, the due date for the
timely filing of Taxpayer’s Year 2 federal income tax return. Taxpayer, however, did not
file a request for an extension of time under § 301.9100-3 to make a late § 475(f)(1)
election effective for Year 2 until Date 10.

                                 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.
PLR-120645-22                                         5

       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
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. 99-173 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 § 475.4 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.


3 Section 6 of Rev. Proc. 99-17 was superseded by Rev. Proc. 99-49, 1999-2 C.B. 725.
4 Rev. Proc. 2019-43 is the automatic method change revenue procedure that applied to the year that

Taxpayer’s election would have been effective, had it been timely filed.
PLR-120645-22                               6

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.

        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).
PLR-120645-22                                           7

                    (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 5,
Taxpayer would have had to make the election by Date 1, 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 10. This late filing provided Taxpayer the
benefit of over k 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. 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.

        Accordingly, 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 k 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.5 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 Taxpayer’s 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.


5 Taxpayer did not offer factual proof on this point.
                                                 Rather, Taxpayer only argued that Taxpayer would
have timely made the election even without knowledge of the factual developments that made the
election advantageous.
PLR-120645-22                                 8

                                      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 5. 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) to use
the mark-to-market method of accounting for the taxable year that ended Date 5 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.

        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,



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



Enclosures:

Copy of this letter
Copy for section 6110 purposes
PLR-120645-22                                           9

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