A securities-trading fund is denied 9100 relief for a late mark-to-market election because it acted with hindsight

Plain-English summary

A securities-trading fund wanted to make a mark-to-market election under section 475(f), which lets a trader treat gains and losses as ordinary (so trading losses are fully deductible rather than capped as capital losses). That election must be filed by the due date of the return for the year before the election year, and the fund missed the deadline. It later asked the IRS for relief under Treasury Regulation 301.9100-3 to file the election late. The IRS denied the request. Relief requires the taxpayer to have acted reasonably and in good faith and that granting it not prejudice the government, and the IRS found neither was met: the fund waited until after it knew its trading results and its tax character (an ordinary-income allocation flagged the issue), so it was using hindsight, and because a mark-to-market election is an accounting-method change requiring a section 481(a) adjustment, relief is deemed to prejudice the government absent unusual and compelling circumstances, which the fund did not show. This is an adverse ruling.

Ruling snapshot

• Question: Should the IRS grant an extension of time under Treas. Reg. § 301.9100-3 for a trader to make a late § 475(f) mark-to-market election?
• Outcome: Denied (taxpayer used hindsight and relief would prejudice the government)
• Key authorities: IRC § 475(f); Treas. Reg. § 301.9100-3(b)(3), (c)(2); Rev. Proc. 99-17

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202143004 Third Party Communication: None
Release Date: 10/29/2021 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-103363-21
Date:
July 30, 2021

LEGEND:

Taxpayer: = -----------------------------------------------------

Feeder Fund = -------------------------------------------------

Individual = ---------------------

Manager = ----------------------------------

Manager GP = -------------

Fund GP = ----------------------------

Partnership X = ---------------------------------------------

Fund Y = -----------------------------------------

State = -------------

Country = ----------------------

a = ---

Date 1 = --------------------------
PLR-103363-21 2

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

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

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

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

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

Date 7 = ---------------------

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

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

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

Date 11 = ----------------

Year 1 = -------

Year 2 = -------

Year 3 = --------

Year 4 = -------

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

   This letter responds to a request for a private letter ruling that Taxpayer filed with

the Internal Revenue Service (Service). 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. Taxpayer requested relief on Date 2.

                                            FACTS

  On Date 3, Individual formed Taxpayer, a Country exempted limited partnership.

Feeder Fund was formed by Individual and was a limited partner of Taxpayer.
Taxpayer was the master fund for Feeder Fund, a State limited partnership. Individual
formed Fund GP, a State limited liability company. Fund GP was the general partner of
PLR-103363-21 3

Taxpayer and Feeder Fund. Individual was admitted as the managing member of Fund
GP. Fund GP was entitled to an allocation of profits from Taxpayer and Feeder Fund.

    Individual formed Manager GP, a State limited liability company, and Manager, a

State limited partnership. Individual was also a managing member of Manager GP.
Manager GP was a general partner of Manager. Manager was paid a fee by Taxpayer
and Feeder Fund for investment management services.

   Taxpayer represents that ultimately most of the Year 1 allocable items of

Taxpayer and Feeder Fund, and all the Year 1 allocable items of Manager were
included in the taxable income of Individual.

    Feeder Fund began trading securities on Date 4. Feeder Fund conducted its

trading activities through Taxpayer from Date 4 until Taxpayer ceased all trading activity
in Date 5. Taxpayer was dissolved later in Year 1. Taxpayer sustained annual net
losses in each year of its existence. Taxpayer represents that it qualified as a trader in
securities for federal income tax purposes from Date 6 through Date 5. Feeder Fund
continued trading activities directly until Date 7, when Feeder Fund ceased all trading
activity.

   Partnership X is a State limited partnership that sponsors Fund Y, a State limited

partnership. Taxpayer represents that Individual entered into negotiations with
Partnership X for Partnership X to engage Manager to perform sub-advisory services for
the portion of Fund Y's investment program that aligned with Taxpayer’s investment
strategy. These negotiations resulted in the execution of a Sub-Advisory Agreement
(“the Agreement”) on Date 8. The Agreement provided that for federal income tax
purposes, Manager would be treated as a partner of Fund Y. The Agreement, however,
did not expressly address the tax character of Manager's share of Fund Y's profits.
Taxpayer represents that based on conversations with Partnership X, Individual’s
understanding was that the character of Manager's allocable share of Fund Y's profits
would be capital gain.

   The Schedule K-1 for Year 1 was issued to Manager on Date 9. The Schedule

K-1 showed that Manager had been allocated a share of Fund Y's profits, and that the
entire allocation was characterized as ordinary income. Taxpayer represents that the
ordinary character was because Fund Y had made an election under § 475(f)(1) of the
Code to use the mark-to-market method of accounting, effective for the taxable year
that ended Date 1. Taxpayer represents that this was the first time that Individual
became aware of the existence of a § 475(f)(1) election. Taxpayer represents that
Partnership X never mentioned, provided written information about, or otherwise
discussed the possibility of Fund Y making an election under § 475(f)(1). Manager
timely filed its extended federal income tax return for Year 1 based on the Schedule K-1
that Manager received from Partnership X. Taxpayer represents that in late Year 2,
Manager terminated its relationship with Partnership X and Manager ceased operations.
PLR-103363-21 4

   Taxpayer represents that Individual would have caused Taxpayer to have made

a timely election under § 475(f)(1) for Year 1 if Individual had known that Fund Y had
made the election for Year 1. If Taxpayer had made a timely election under § 475(f)(1)
for Year 1, the election would have been due on Date 10, the due date of Taxpayer’s
Year 3 federal income tax return (without regard to any extension).

   In Date 11, during the process of preparing Manager's Year 2 federal income tax

return, Individual became aware of the process to request an extension of time under
§ 301.9100 of the Regulations to seek relief to make a late § 475(f)(1) election.
Individual subsequently met with counsel to discuss the matter, and then on Date 2
requested a private letter ruling on behalf of Taxpayer seeking an extension of time
under § 301.9100 to make a § 475(f)(1) election effective for the taxable year that
ended Date 1.

                             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 requirements for making an

election under § 475(f). 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.
PLR-103363-21 5

   Section 6.01 of Rev. Proc. 99-171 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 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.

    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 § 475.2 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.

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

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

Taxpayer’s election filing, had it been timely filed.
PLR-103363-21 6

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 10, the due date of Taxpayer’s
Year 3 federal income tax return (without regard to any extension). Taxpayer’s request
for a late filing of the § 475(f)(1) election was not made until Date 2, which provided
Taxpayer the benefit of nearly a months of hindsight.

    Additionally, Manager received a Schedule K-1 on Date 9, showing Manager’s

allocable share and tax character of Fund Y’s Year 1 trading profits before Taxpayer
filed in Year 4 a request for relief under § 301.9100-3 to make a late § 475(f)(1) election.
Taxpayer gained a benefit from hindsight because Taxpayer was able to determine the
effect of a § 475(f)(1) election with the benefit of knowing Manager’s allocable share
and tax character of profits from Fund Y for Year 1. Moreover, Taxpayer did not provide
strong proof showing that its decision to seek relief to make a late election did not
PLR-103363-21 7

involve hindsight. 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
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) 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 mark-to-
market election under § 475(f)(1).

   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.
PLR-103363-21 8

    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,


                                              ______________________________
                                              K. Scott Brown
                                              Branch Chief, Branch 3
                                              Office of the Associate Chief Counsel
                                              (Financial Institutions & Products)

Enclosures:

Copy of this letter
Copy for section 6110 purposes

cc: