IRS denies a trader's late mark-to-market election

Plain-English summary

An individual substantially increased securities trading during part of a year but did not make a timely § 475(f)(1) mark-to-market election. Most of the year's realized trading losses and disallowed wash-sale losses arose after the election deadline, and the taxpayer later filed a late election statement, Form 3115, and a return reporting gains and losses on a mark-to-market basis. The IRS found that the taxpayer had the benefit of hindsight because facts developing after the deadline showed the precise tax advantage of the election, and the taxpayer did not provide strong proof that hindsight did not influence the request. The IRS also found that granting relief would prejudice the government because the election required an accounting-method change with a § 481(a) adjustment and the taxpayer had not shown unusual and compelling circumstances. It denied the extension and did not decide whether the taxpayer's trading activity was sufficient to qualify as a securities-trading business or what consequences followed from the return already filed.

Ruling snapshot

• Question: Could the taxpayer make a late § 475(f)(1) election to use mark-to-market accounting for a securities-trading activity?
• Outcome: denied (the IRS found a lack of reasonable good faith and prejudice to the government's interests)
• Key authorities: IRC §§ 446, 475(f), 481(a), 7805(d); Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 99-17

Full text (IRS public release)

Internal Revenue Service                                         Department of the Treasury
                                                                 Washington, DC 20224

Number: 202037007                                                Third Party Communication: None
Release Date: 9/11/2020                                          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-124837-19
                                                                 Date:
                                                                 April 16, 2020




Legend

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

Accountant               =          --------------------------------

Year 1                   =          -------

Year 2                   =          -------

Year 3                   =          -------

Month X                  =          --------

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

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

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

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

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

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

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

b                        =          ------
PLR-124837-19


c                        =   ---

d                        =   -----------

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

f                        =   ---

g                        =   --



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

       This letter responds to a request for a private letter ruling that Taxpayer filed with
the Internal Revenue Service (Service). Taxpayer’s letter and subsequent submissions
requested an extension of time under § 301.9100 of the Procedure and Administration
Regulations to make an election to use the mark-to-market method of accounting under
§ 475(f)(1) of the Internal Revenue Code, effective for the taxable year that ended
calendar year end, Year 2. Taxpayer’s request was filed with our office on Date 5.

                                           Facts

       Taxpayer is the chief executive officer and co-owner of a privately held company.
Due to less demand on his time in that business, Taxpayer dramatically increased his
trading of securities during several months of the first half of Year 2. During the last
several months of Year 2, however, Taxpayer significantly curtailed his trading activity.

      During Year 2, Taxpayer realized $ a of losses from his securities trading activity.
The vast majority of the losses, b percent, were realized after Date 1, the due date for
making a mark-to-market election under § 475(f)(1) for Year 2. Further, approximately
c percent of Taxpayer’s $ d of disallowed wash sale losses in Year 2 were incurred after
the Date 1 due date for making the § 475(f)(1) election. Taxpayer reported on his
Year 2 federal income tax return a total capital loss carryover of $ e at the end of
Year 1.

       Taxpayer states that he was not familiar with tax aspects of securities trading and
was not aware in Month X, Year 2 , that his increased trading activity during the first part
of Year 2 might have enabled him to claim that he was a trader eligible to make a
§ 475(f)(1) election. In early Year 3, Taxpayer engaged Accountant, a certified public
accountant who has served as Taxpayer’s tax return preparer for many years, to
prepare his Year 2 federal income tax return. Consistent with the engagement letter,
Taxpayer began to provide Accountant his tax information during Month X, Year 3, to



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enable Accountant to prepare Taxpayer’s Year 2 return. Accountant states that he did
not become aware until Date 2 or later that Taxpayer had dramatically increased his
trading activity for several months during the first half of Year 2.

        After further correspondence with Taxpayer, Accountant advised Taxpayer on or
after Date 3, on the requirements to be classified as a trader. Accountant explained to
Taxpayer that a § 475(f)(1) election effective for Year 2 would have had to have been
made by Date 1, and therefore was too late. Accountant and Taxpayer discussed
Taxpayer’s ability to pursue relief under § 301.9100-3 to make a § 475(f)(1) election
effective for Year 2. Accountant filed a request for an automatic extension to file the
Year 2 federal income tax return and looked into submiting a request with the Service
for relief under § 301.9100-3 to make a late § 475(f)(1) election.1

       On Date 4, Taxpayer filed a late § 475(f)(1) election statement for the Year 2 tax
year. Taxpayer also filed with the Service a Form 3115, Application for Change in
Accounting Method on that date. Taxpayer’s Form 3115 requested a Year 2 year of
change to change from the “[c]ash method as an investor in securities . . . [to the]
[m]ark-to-market method under section 475 for a trader in securities.”

       Taxpayer submitted a request for a private letter ruling seeking an extension of
time under § 301.9100-3 to make a late § 475(f)(1) election for Year 2. This request
was filed with the Service on Date 5, more than f months after the due date for filing the
§ 475(f)(1) election. The request was also made approximately g months after
determining that relief would have to be requested from the Service for Taxpayer to
make a late election.

       On Date 6, Accountant filed Taxpayer’s federal income tax return for Year 2 with
the Service. Taxpayer filed his Year 2 federal income tax return and reported gains and
losses from securities on a mark-to-market basis, presumably based on the assumption
that the Service would grant Taxpayer relief to make the late § 475(f)(1) election for
Year 2.

                                        Law and Analysis

       Taxpayer is not entitled to § 301.9100 relief 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


1 With that extension, Taxpayer made a tax payment consistent with the amount of tax reported on his

subsequently filed Year 2 return.



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PLR-124837-19

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.

        Revenue Procedure 99-17, 1999-1 C.B. 503, sets forth the requirements for
making an election under § 475(f). Under section 5.03 of that revenue procedure, a
taxpayer must file its 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. 99-172 provided 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 regulations promulgated thereunder apply. Section 6.03 of Rev. Proc.
99-17 generally provided 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.

        Section 23.01 of Rev. Proc. 2017-30, 2017-18 I.R.B. 1131, provides procedures
for a trader in securities that has made a § 475(f)(1) election to obtain automatic
consent of the Commissioner to change the trader’s method of accounting for securities
to use the mark-to-market method of accounting under § 475.3 Section 23.01(4) of
Rev. Proc. 2017-30 refers to section 5 of Rev. Proc. 99-17 for the requirements to make
a § 475(f)(1) election.

        Revenue Procedure 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 in
Rev. Proc. 2017-30. Under section 7.02 of Rev. Proc. 2015-13, unless otherwise

2 Section 6 of Rev. Proc. 99-17 was superseded by Rev. Proc. 99-49, 1999-2 C.B. 725.
3 Rev. Proc. 2017-30 was the automatic method change revenue procedure that would have applied to

Taxpayer’s' election filing, had it been timely filed.



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PLR-124837-19

provided in a specific change listed in Rev. Proc. 2017-30, 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 23.01 of Rev. Proc. 2017-30 does not contain an exception to the rule in
section 7.02 of Rev. Proc. 2015-13.

       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 it 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 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
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



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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 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. Taxpayer did not file his request for relief under § 301.9100-3 until
Date 5. The late filing of the § 475(f)(1) election provided Taxpayer the benefit of over
f months of hindsight. Taxpayer continued to trade during Year 2 and realized the vast
majority of his trading losses and wash sale losses after the Date 1 due date for filing a
§ 475(f)(1) election for Year 2. Taxpayer gained advantage from that hindsight because
Taxpayer was able to determine the precise effect of a § 475(f)(1) election with the
benefit of knowledge that his ongoing trading activities after the Date 1 due date (a)
produced a dramatic increase in realized trading losses and wash sale losses, which
under § 475 would receive favorable treatment, and (b) did not produce meaningful
gains to absorb the capital losses carrying over from Taxpayer’s Year 1 return. Thus,
Taxpayer’s specific facts materially changed after the due date for making the
§ 475(f)(1) election, and those specific fact changes made that election advantageous
to Taxpayer. Moreover, Taxpayer did not provide strong proof showing that his decision
to seek relief 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, but instead contends that Taxpayer’s accounting method
regulatory election is not one that requires Taxpayer to make a § 481(a) adjustment

4 Taxpayer did not offer factual proof on this point.
                                                 Rather, Taxpayer only argued that he would have
timely made the election even without knowledge of the factual developments that made the election
advantageous.



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PLR-124837-19

because he was not engaged in the trade or business of being a trader in securities
prior to Year 2.

       Taxpayer’s argument is misplaced. Section 4 of Rev. Proc. 99-17 states that the
election under § 475(f) determines the method of accounting an electing trader is
required to use for federal income tax purposes for securities subject to the election.
Because making a § 475(f) election is integrally related to making a change in
accounting method to use the mark-to-market method of accounting under § 475, it is
an accounting method regulatory election subject to § 301.9100-3(c)(2). Further, a
§ 475(f)(1) election requires a change in method of accounting that requires a § 481(a)
adjustment. The change in method of accounting is not permitted to be implemented on
a cut-off method.5

       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 given that 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 to make an
election under § 475(f) to use the mark-to-market method of accounting. Specifically,
Taxpayer has failed to demonstrate that he has acted reasonably and in good faith, and
that the grant of 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) for
Year 2 is denied.

       Except as expressly provided herein, no opinion is expressed or implied
concerning the federal 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 mark-to-
market election under § 475(f)(1).6 Furthermore, no opinion is expressed on the
consequences of Taxpayer’s filing of his Year 2 income tax return, with securities
trading gains and losses reported on a mark-to-market basis, without having obtained
§ 301.9100-3 relief to make a late § 475(f)(1) election.


5 Example 4 of § 301.9100-3(f) demonstrates that the language in § 301.9100-3(c)(2)(ii) does not apply to

accounting method changes that are required to be made on a cut-off basis. By contrast, Example 5 of
§ 301.9100-3(f) illustrates that the interests of the Government are deemed to be prejudiced under
§ 301.9100-3(c)(2)(ii) if the facts are varied such that a cut-off method is not permitted for the accounting
method change.
6 Based on the information supplied by Taxpayer, there is an issue 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).



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       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 representative.


                                       Sincerely,




                                       Patrick E. White
                                       Senior Counsel, Branch 3
                                       Office of the Associate Chief Counsel
                                       (Financial Institutions and Products)



Enclosures:
     Copy of this letter
     Copy for section 6110 purposes


 cc:




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