Late mark-to-market election denied for hindsight and prejudice

Plain-English summary

An individual who actively traded securities sought permission to make a late section 475(f)(1) mark-to-market election. The taxpayer had not known about the election when trading began and later learned that wash-sale rules prevented certain capital losses from offsetting gains. By the time relief was requested, the taxpayer knew the later trading results and that the election would have been beneficial. The IRS concluded that this hindsight meant the taxpayer had not acted reasonably and in good faith. It also found that the election was an accounting-method election requiring a section 481 adjustment, so granting relief would prejudice the government absent unusual and compelling circumstances. The IRS denied the requested extension without deciding whether the taxpayer otherwise qualified as a trader in securities.

Ruling snapshot

• Question: Could a securities trader make a late section 475(f)(1) mark-to-market election after learning the results that made the election advantageous?
• Outcome: denied
• Key authorities: IRC §§ 446, 475(f), 481, 1091, 7805; Treas. Reg. §§ 301.9100-1, 301.9100-3; Rev. Proc. 99-17; Rev. Proc. 2015-13; Rev. Proc. 2022-14

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202403006                                              Third Party Communication: None
Release Date: 1/19/2024                                        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-109300-23
                                                               Date:
                                                               October 19, 2023




LEGEND:

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

Year 1                   =        -------

Year 2                   =        -------

Year 3                   =        -------

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

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

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

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

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

a                        =        ---

PLR-109300-23                                 2



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

       This letter responds to a request for a private letter ruling that Taxpayer filed with
the Internal Revenue Service (the “Service”) on Date 1. Taxpayer’s letter requested an
extension of time under § 301.9100-3 of the Procedure and Administration 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, beginning with the taxable year that ended
Date 2.

                                           FACTS

       Taxpayer represents that Taxpayer engages in securities trading. For the Year 1
taxable year, Taxpayer reported Form W-2 salary and wage income, dividend income,
interest income, capital losses, and other income on Taxpayer’s Form 1040, U.S.
Individual Income Tax Return.

        Taxpayer represents that during Date 3, Taxpayer began to actively trade
securities in a revocable trust account, making hundreds of securities trades on a typical
trading day. While Taxpayer had engaged in some securities trading activity prior to the
Year 1 taxable year, Taxpayer represents that because active securities trading in this
manner was a new activity for Taxpayer, Taxpayer was unaware of the possibility of
electing to use the mark-to-market method of accounting under § 475(f)(1) for an
eligible trader in securities.

       Taxpayer’s acquisitions of certain securities within the wash sale period
described in § 1091(a) triggered the wash sale rules, which disallowed certain capital
losses incurred by Taxpayer during Year 1. The application of the wash sale rules
during Year 1 caused the disallowed capital losses incurred during Year 1 to not be
applied to offset the aggregate capital gains incurred in Year 1.

      At some point during the Year 2 taxable year, after learning of the possibility of
making a § 475(f)(1) election and the income tax consequences of Taxpayer’s Year 1
wash sales, Taxpayer realized that it would have been beneficial for Taxpayer to have
made a § 475(f)(1) election with an effective date of the Year 1 taxable year.

       To make a timely § 475(f)(1) election for the Year 1 taxable year, Taxpayer had
to make the § 475(f)(1) election by Date 4, the unextended due date of Taxpayer’s
federal income tax return for the Year 3 taxable year. Taxpayer, however, did not file a
request for relief under § 301.9100-3 to make a late § 475(f)(1) election effective for the
Year 1 taxable year until Date 5.

PLR-109300-23                                 3

                                  LAW AND ANALYSIS

       Taxpayer is not entitled to relief under § 301.9100-3 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 § 301.9100-3 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.

        When § 475(f) was enacted, Congress expressed its understanding that mark-to-
market elections “will be made in the time and manner prescribed by the Secretary.”
H.R. Rep. No. 105-148 at 446 (1997). The Commissioner prescribed the time and
manner for making these elections in Rev. Proc. 99-17, 1999-1 C.B. 503. Rev. Proc.
99-17 sets forth the exclusive procedures for a taxpayer who is a trader in securities to
make an election under § 475(f)(1) 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. For a trader in securities, the statement must describe
the election being made, the first taxable year for which the election is effective, and the
trade or business for which the election is made. Section 4 of Rev. Proc. 99-17
provides that an election under § 475(f)(1) 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 a taxpayer is on an impermissible method of accounting if the taxpayer
fails to change the taxpayer’s method of accounting to comply with the election.

        A change to the mark-to-market method of accounting under § 475 is a change in
method of accounting to which the provisions of §§ 446 and 481, and the Income Tax
Regulations promulgated thereunder, apply. Rev. Proc. 2015-13, 2015-5 I.R.B. 419, as
clarified and modified by Rev. Proc. 2015-33, 2015-24 I.R.B. 1067, and as modified by
Rev. Proc. 2021-34, 2021-35 I.R.B. 337, Rev. Proc. 2021-26, 2021-22 I.R.B. 1163, Rev.
Proc. 2017-59, 2017-48 I.R.B. 543, and section 17.02(b) and (c) of Rev. Proc. 2016-1,
2016-1 I.R.B. 1., 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. 2022-14, 2022-7

PLR-109300-23                                     4

I.R.B. 502. Section 24.01 of Rev. Proc. 2022-14 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 § 475.1 Section 24.01(4) of Rev. Proc. 2022-14 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.
Accordingly, the change in method of accounting made 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. Section
301.9100-2 applies only to certain regulatory elections, and an election under
§ 475(f)(1) does 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


1
 Rev. Proc. 2022-14 is the automatic method change revenue procedure that would have applied to
Taxpayer’s election had the election been timely filed.

PLR-109300-23                                5

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 Year 1 taxable year, Taxpayer would
have had to make the election by Date 4, the unextended due date of Taxpayer’s Year
3 federal income tax return. Taxpayer’s request for a late filing of a § 475(f)(1) election
was not made until Date 5. This late filing provided Taxpayer the benefit of over a
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)(1) 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 the first day
of the Year 1 taxable year, fully knowing the results of Taxpayer’s securities trading
activities for over a 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

PLR-109300-23                                       6

make a late election did not involve hindsight. 2 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.

       Because 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 Year 1 taxable year. 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 beginning in the taxable year that ended Date 2, 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.




2
  Taxpayer did not offer factual proof on this point. Rather, Taxpayer only argued that Taxpayer would
have made a timely § 475(f)(1) election, even without knowledge of the factual developments that made
the election advantageous.

PLR-109300-23                                         7

       This ruling is directed only to the taxpayer that requested it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.



                                                          Sincerely,



                                                          ______________________________
                                                          Jonathan A. LaPlante
                                                          Senior Technician Reviewer, Branch 3
                                                          Office of the Associate Chief Counsel
                                                          (Financial Institutions & Products)




Enclosures:

Copy of this letter
Copy for section 6110 purposes


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