Trading firm received 30 days for late mixed-straddle election

Plain-English summary

A proprietary trading firm moved a strategy involving offsetting Section 1256 and non-Section 1256 positions from a partnership to its disregarded broker-dealer entity. Although predecessor entities had timely mixed-straddle-account elections and the firm intended the strategy to remain covered, the migration required a new election. The tax team missed that requirement because the migration was uncommon, its usual election drafter had resigned, and an accounting firm was not told about the move. The IRS found reasonable cause under the mixed-straddle regulation and granted 30 days to make the election for the disregarded entity's activity. Because the regulation provides its own late-election standard, the general Treasury Regulation Section 301.9100-3 rules did not apply. The ruling did not decide whether the taxpayer's designated class of activities was permissible.

Ruling snapshot

• Question: Did the taxpayer show reasonable cause for missing the mixed-straddle-account election after moving trading activity to a disregarded entity?
• Outcome: approved
• Key authorities: IRC § 1092(b); Temp. Treas. Reg. § 1.1092(b)-4T

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202415004                                             [Third Party Communication:
 Release Date: 4/12/2024                                       Date of Communication: Month DD, YYYY]
 Index Number: 1092.00-00, 1092.05-00,
               1092.05-02                                      Person To Contact:
                                                               -----------------------------------, ID No. -------
 ------------------------------------------------------        -----------------
 --------------------------------------                        Telephone Number:
 ------------------------------------                          --------------------
 -------------------------------                               Refer Reply To:
                                                               CC:FIP:B01
                                                               PLR-114443-23
                                                               Date:
                                                               January 16, 2024




 Taxpayer                 = ------------------------------------------------------------------------------------
                            ----------------------
 DRE                      = ------------------------------------------------------------------------------------
                            ------------------------
 Company                  = ------------------------------------------------------------------------------------
                            ------------------------
 Partnership              = ------------------------------------------------------------------------------------
                            ------------------------
 Year 1                   = ----------------------------------------------------
 Year 2                   = ----------------------------------------------------
 Date 1                   = ----------------------
 Date 2                   = ---------------------
 Date 3                   = ---------------------
 Date 4                   = ----------------
 Date 5                   = ---------------------
 State                    = -------------
 Accounting Firm          = ------------------------------------
 1
 Accounting Firm          = -----------------------
 2
 z                        =

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

       This is in reply to a letter dated July 20, 2023, submitted on behalf of Taxpayer.
Taxpayer requests an extension of time to file an election pursuant to section 1092(b) of
the Internal Revenue Code (the “Code”) and section 1.1092(b)-4T(f) of the Temporary
Income Tax Regulations (a “mixed straddle account election”).
PLR-114443-23                                2

                                         FACTS

      Taxpayer is a limited liability company formed under the laws of State. Taxpayer
uses an accrual method of accounting. Taxpayer is a global proprietary trading firm.

       Taxpayer formed DRE as a limited liability company under the laws of State.
DRE is a disregarded entity for federal income tax purposes. DRE is classified as a
broker/dealer under securities laws.

       Company is a limited liability company formed under the laws of State. Company
and Taxpayer have almost exactly the same ultimate beneficial owners. Company and
Taxpayer are partners in Partnership, a limited liability company treated as a
partnership for federal tax purposes. Company, Taxpayer, DRE and Partnership have
substantial common managerial control. Taxpayer’s employees keep the records of
account of all four entities.

        During Year 1 and Year 2, Taxpayer and its affiliates engaged in a program of
trading that entailed trading section 1256 positions offset by non-section 1256 positions
(the “specified activity”). Taxpayer represents that the specified activity gave rise to
mixed straddles and that the trading entity was eligible under section 1.1092(b)-4T(f) to
elect to establish one or more mixed straddle accounts with respect to the specified
activity.

       The entity that conducted (or was treated for federal income taxes as conducting)
the specified activity changed twice during the period comprising Year 1 and Year 2. In
Year 1, Partnership conducted the activity. At that time, Partnership was wholly owned
by Company and disregarded for federal income tax purposes. Company made a
timely mixed straddle account election with respect to the specified activity for Year 1.

        On Date 1, Taxpayer acquired a z percent interest in Partnership, converting it
into a partnership for federal income tax purposes. Partnership made a timely mixed
straddle account election with respect to the specified activity for Year 2 on Date 2.

       Later in Year 2, Taxpayer migrated the specified activity from Partnership to DRE
so the specified activity would be conducted through a broker/dealer. The migration did
not entail a transfer of assets or an account. On Date 3, Partnership stopped the
specified activity, and DRE carried it out thereafter. The specified activity in the hands
of DRE required a new mixed straddle account election by Taxpayer. To be timely, the
election needed to be filed by Date 4.

        Taxpayer represents that the migration of a mixed straddle strategy from one
entity to another was a new or uncommon occurrence, and it was outside the regular
annual process of analyzing and making elections for Taxpayer and its affiliates. The
migration occurred without a formal analysis by the tax team, who did not realize that a
new mixed straddle account election would be required. In addition, the member of the
PLR-114443-23                                 3

tax team who typically drafted mixed straddle account elections resigned early in
Year 2. That employee was the person who would have been most likely to notice that
mixed straddle activity was being booked into an account not subject to a mixed
straddle account election. As a result, Taxpayer did not make a timely mixed straddle
account election for the specified activity in the hands of DRE.

      Taxpayer represents that Taxpayer intended the specified activity to continue to
be subject to a mixed straddle account election. The mixed straddle account elections
made for the specified activity by Company and Partnership were based on instructions
to Taxpayer’s tax team from the co-heads of the trading team that designed and
operated the trading strategy.

       In Years 1 and 2, Taxpayer engaged Accounting Firm 1 to provide tax
compliance services as well as tax advice, including prior mixed straddle account
elections. Due to miscommunication between the tax team and Accounting Firm 1,
Accounting Firm 1 was not aware of the transfer of the specified activity from
Partnership to DRE.

       During the fall of Year 2, the tax team realized that the specified activity had
migrated from Partnership to DRE. On Date 5, Taxpayer approached Accounting
Firm 2, to determine whether relief was available for the delinquent mixed straddle
account election. Accounting Firm 2 advised Taxpayer that relief was available for
reasonable cause under section 1.1092(b)-4T(f).

      Consequently, Taxpayer requests an extension of time to file a mixed straddle
account election under sections 1092(b) and 1.1092(b)-4T(f).

                                   LAW AND ANALYSIS

        Section 1.1092(b)-4T(a) generally permits a taxpayer to elect (in accordance with
section 1.1092(b)-4T(f)) to establish one or more “mixed straddle accounts.” Section
1.1092(b)-4T(b) defines a mixed straddle account to mean an account for determining
gains and losses from all positions held as capital assets in a designated class of
activities by the taxpayer at the time the taxpayer elects to establish a mixed straddle
account.

       Section 1.1092(b)-4T(f)(1) generally provides that, except as otherwise provided,
the election to establish one or more mixed straddle accounts for a taxable year must
be made by the due date (without regard to any extensions) of the taxpayer's income
tax return for the immediately preceding taxable year (or part thereof).

       Section 1.1092(b)-4T(f)(1) further provides that if a taxpayer begins trading or
investing in positions in a new class of activities during a taxable year, the taxpayer
must make the election with respect to the new class of activities by the later of the due
date of the taxpayer’s income tax return for the immediately preceding taxable year
PLR-114443-23                                 4

(without regard to any extensions), or 60 days after the first mixed straddle in the new
class of activities is entered into.

        Section 1.1092(b)-4T(f)(1) also provides that if an election is made after the time
specified above, the election will be permitted only if the Commissioner concludes that
the taxpayer had reasonable cause for failing to make a timely election. As section
1.1092(b)-4T(f)(1) provides specific guidance about making a late mixed straddle
account election, the rules generally applicable to late elections described in section
301.9100-3 do not apply to this late mixed straddle account election.

       Section 1.1092(b)-4T(f)(2) sets forth the manner for making the election,
including that the election is to be made on Form 6781, Gains and Losses From Section
1256 Contracts and Straddles.

                                      CONCLUSION

       Based on the facts and representations submitted, we conclude that Taxpayer
has shown reasonable cause for failing to make a timely mixed straddle account
election under section 1.1092(b)-4T(f) for the specified activity in the hands of DRE.
Therefore, we grant Taxpayer's request for an extension of time to make a mixed
straddle account election under section 1.1092(b)-4T for one or more mixed straddle
accounts associated with the specified activity in the hands of DRE for Year 2. This
extension will expire 30 days from the date of this letter. The mixed straddle account
election must be made in the manner prescribed in section 1.1092(b)-4T(f)(2) and filed
with the Director having audit jurisdiction over Taxpayer's federal income tax return.

       Except as specifically ruled upon above, no opinion is expressed as to the tax
treatment of any transactions under the provisions of any other sections of the Code or
Income Tax Regulations which may be applicable thereto, or the tax treatment of any
conditions existing at the time of or effects resulting from the transaction. Specifically,
no opinion is expressed concerning whether the positions designated by Taxpayer as
the class of activities is a permissible designation under section 1.1092(b)-4T(b)(2).

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.
PLR-114443-23                                            5

        In accordance with the Power of Attorney on file with this office, copies of this
letter are being sent to your authorized representatives.


                                                               Sincerely,



                                                               ______________________________
                                                               Steven Harrison
                                                               Branch Chief, Branch 1
                                                               Office of Associate Chief Counsel
                                                               (Financial Institutions & Products)

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