Late mixed straddle account elections receive a 30-day extension

Plain-English summary

A corporate taxpayer failed to renew its mixed straddle account election for two tax years after an acquisition transferred responsibility to a tax department unfamiliar with the annual filing requirement. The department believed that an earlier Form 6781 election remained effective until revoked and prepared one consolidated return consistently with that belief. An outside accounting firm's audit later uncovered the error. The IRS found reasonable cause under the specific late-election rule in Temporary Treas. Reg. § 1.1092(b)-4T(f), granted relief for both years, and required the taxpayer to file the elections within 30 days. The general late-election rules of Treas. Reg. § 301.9100-3 did not apply because the mixed straddle regulation supplies its own standard.

Ruling snapshot

• Question: Could the taxpayer make late mixed straddle account elections for two tax years after mistakenly treating an earlier election as continuing?
• Outcome: Approved, with the elections due within 30 days of the ruling.
• Key authorities: IRC § 1092(b); Temp. Treas. Reg. § 1.1092(b)-4T(f).

Full text (IRS public release)

Internal Revenue Service                                          Department of the Treasury
                                                                  Washington, DC 20224

Number: 201637011                                                 Third Party Communication: None
Release Date: 9/9/2016                                            Date of Communication: Not Applicable
Index Number: 1092.05-00, 1092.05-02
                                                                  Person To Contact:
---------------------------------------------------------         ---------------, ID No. ------------------
------------------------------------------------------------      Telephone Number:
-----------------                                                 ----------------------
-----------------------------                                     Refer Reply To:
----------------------------------------------------              CC:FIP:B03
-------------------------------------------                       PLR-141499-15
                                                                  Date:
                                                                  June 15, 2016




Legend

Taxpayer                   =        ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
                                    ------------------------
Entity 1                   =        ----------------------------------------------------
Entity 2                   =        ---------------------------------
Entity 3                   =        ---------------------------------
Entity 4                   =        -----------------------------------------
Accounting Firm            =        ----------------

Taxable Year 1             =        ---------------------------------------------------------------------------------
                                    -------------------------------------
Taxable Year 2             =        -----------------------------------------------------------
Taxable Year 3             =        -----------------------------------------------------------

Date 1                     =        -----------------------
Date 2                     =        -----------------------
Date 3                     =        --------------------------
Date 4                     =        ---------------------------
Date 5                     =        --------------

State                      =        -------------
Industry                   =        ---------------------------------------------------------------
Derivatives                =        ------------------------------------------------------------
Individual                 =        ---------------------------

Dear ------------------------:
PLR-141499-15                                2

        This is in reply to a letter dated December 8, 2015, submitted on behalf of
Taxpayer by its authorized representative. Taxpayer requests an extension of time to
file an election under section 1092(b) of the Internal Revenue Code and
section 1.1092(b)-4T(f)(1) of the Temporary Income Tax Regulations to establish one or
more mixed straddle accounts for Taxable Year 2 and Taxable Year 3.

                                         FACTS

       Taxpayer, a State corporation, is a wholly-owned subsidiary of Entity 1 and is
included in the consolidated returns of Entity 1 for U.S. Federal income tax purposes.
Entity 1 is in the business of Industry in the U.S. Taxpayer is the sole shareholder of
Entity 2, which is in the business of trading various Derivatives.

       On Date 2, Entity 1 acquired Taxpayer from Entity 3 through a wholly-owned
holding corporation, Entity 4. Prior to the acquisition, Entity 3 had made an election to
establish one or more mixed straddle accounts relative to the Derivatives held by
Entity 2 during Entity 3’s taxable year ending on Date 4. Entity 2 is a disregarded entity
for U.S. Federal tax purposes.

       For all periods after Entity 1’s acquisition of Taxpayer, the tax department of
Entity 1 served as the tax department for Taxpayer, Entity 2, and Entity 4. Neither the
vice president of tax for Entity 1, Individual, nor the other members of this tax
department were knowledgeable about the procedures for making the mixed straddle
account election. Prior to the acquisition of Taxpayer and its wholly-owned subsidiaries,
the tax department of Entity 1 had only prepared returns and elections that were specific
to Industry, the business of Entity 1.

        During Date 1 and near the time of the acquisition, the tax director of Entity 3
advised Individual that a new mixed straddle account election would be required after
the acquisition of Taxpayer. Accordingly, the tax department of Entity 1 prepared and
filed a Form 6781, Gains and Losses from Section 1256 Contracts and Straddles
(Form 6781), to establish the same mixed straddle accounts that Entity 3 previously
elected to establish relative to the Derivatives held by Entity 2. The election was filed
on or about Date 3 and was effective for Taxpayer’s Taxable Year 1. Individual and the
other members of the tax department were not advised, nor were they otherwise aware,
that under section 1.1092(b)-4T(f)(1), a mixed straddle account election is effective only
for the taxable year in which the election is made. Instead, they erroneously believed
that the election, once made, remained in effect for all future periods until the election
was revoked. As a result, Taxpayer failed to timely file a Form 6781 for Taxable Year 2
and Taxable Year 3. However, consistent with the erroneous belief that the election
made for Taxable Year 1 was still in effect, Entity 1 prepared and filed its consolidated
U.S. Federal income tax return for Taxable Year 2 as if Taxpayer had made a timely
election for Taxable Year 2.
PLR-141499-15                                3

       The error was discovered after Accounting Firm began a third-party audit in
Date 5 of Entity 2’s financial statements for Taxable Year 1 and Taxable Year 2. During
this process, Individual was advised for the first time that a mixed straddle account
election is effective only for the taxable year in which the election is made.

                                  LAW AND ANALYSIS

      Section 1.1092(b)-4T(a) generally permits a taxpayer to elect (in accordance with
paragraph (f) of section 1.1092(b)-4T) 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 election with respect to
the new class of activities must be made by the taxpayer by the later of the due date of
the taxpayer’s income tax return for the immediately preceding taxable year (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. Because
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.

                                     CONCLUSION

       Based on the facts and representations submitted, we conclude that Taxpayer
has shown reasonable cause for failing to make a timely election under
section 1.1092(b)-4T(f). Therefore, we grant Taxpayer’s request for an extension of
time to make the election under section 1.1092(b)-4T(f)(1) for Taxable Year 2 and
Taxable Year 3. This extension will expire 30 days from the date of this letter. The
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 Entity 1’s consolidated U.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
PLR-141499-15                                  4

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.

         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representative.



                                       Sincerely,



                                       __________________________
                                       Patrick White
                                       Senior Counsel, Branch 3
                                       Office of Associate Chief Counsel
                                       (Financial Institutions & Products)


Enclosures (2):
      Copy of this letter
      Copy for section 6110 purposes