The Service has refused to grant an individual an extension of time to make an election under section 475(f) to use the mark-to- market method of accounting.

Citations: LTR 200304006

Date: Sep. 30, 2002
 

The Service has refused to grant an individual an extension of time to make an election under section 475(f) to use the mark-to- market method of accounting.

An individual who was engaged in trading securities used the cash method of accounting. He didn't file the section 475(f) election by the required date because his CPA advised against it.

Based on the facts and representations submitted, the Service said that the individual has not satisfied the requirements for their granting a reasonable extension of time to make an election under section 475(f) to use the mark-to-market method of accounting. There were no unusual or compelling circumstances regarding the individual's failure to make a timely election sufficient to overcome the presumption of prejudice to the government's interests. Also, said the Service, it was unnecessary to consider the individual's assertion that he acted reasonably in good faith because of the lack of unusual and compelling circumstances. Accordingly, the Service refused to grant an extension of time to make the election under section 475(f).

Index Number: 475.08-00, 9100.00-00
Release Date: 1/24/2003
 

Date: September 30, 2002
 

LEGEND:
Taxpayer = * * *
Accountant = * * *
Date 1 = * * *
Date 2 = * * *
Date 3 = * * *
Date 4 = * * *
Year 1 = * * *

Dear * * *

[1] This ruling is in reply to a letter dated May 17, 2002, and subsequent correspondence, requesting an extension of time under § 301.9100-3 of the Procedure and Administration Regulations to make an election under § 475(f) of the Internal Revenue Code to use the mark-to-market method of accounting for the tax year ending Date 1.

[2] Taxpayer represents that beginning on Date 2, Taxpayer has been engaged fulltime in the trade or business of being a trader in securities. During Year 1, Taxpayer hired Accountant, a certified public accountant, to assist Taxpayer with federal and state income tax matters relating to Taxpayer's trading in securities. According to the information submitted, both Taxpayer and Accountant were aware of the availability of making a mark-to-market election for traders in securities under § 475(f) of the Code, as well as the published procedures for making such an election.

[3] Accountant had been engaged by Taxpayer to prepare Taxpayer's Year 1 federal income tax return, which had a filing due date of Date 4, the same deadline for making an election under § 475(f) of the Code for the tax year ending Date 1. On Date 3, Taxpayer and Accountant discussed Taxpayer's federal income tax situation by telephone. Accountant specifically advised Taxpayer not to make an election under § 475(f). After the Date 4 deadline had passed, Taxpayer determined that it would have been more advantageous for Taxpayer's federal income tax situation if Taxpayer had made the election under § 475(f). Taxpayer represents that the sole reason Taxpayer failed to make a timely election under § 475(f) for the tax year ending Date 1 was because Accountant advised Taxpayer against making such an election. Accordingly, Taxpayer has requested an extension of time under section 301.9100-3 to make a timely § 475(f) election for the tax year ending Date 1.

[4] Section 475(f) of the Code provides that a taxpayer engaged in a trade or business as a trader in securities may elect to apply the mark-to-market accounting method to securities held in connection with such trade or business. See § 475(f)(1). 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.

[5] On February 16, 1999, the Internal Revenue Service published Rev. Proc. 99-17, 1999-1 C.B. 503, section 6 superseded by Rev. Proc. 99-49, 1999-2 C.B. 725, superseded by Rev. Proc. 2002-9, 2002-3 I.R.B. 327. Rev. Proc. 99-17 provides the exclusive procedure for traders in securities to make an election to use the mark-tomarket method of accounting under § 475(f). Section 5.03(1) of Rev. Proc. 99-17 provides, in relevant part, that taxpayers (other than a taxpayer for which no federal income tax return was required to be filed for the taxable year immediately preceding the election year) make an election under § 475(f) for a tax year beginning on or after January 1, 1999, by filing a statement no later than the due date (without regard to extensions) of the original federal income tax return for the taxable year immediately preceding the election year. The statement must be attached to either that return or to a request for an extension of time to file that return. Section 5.03 of Rev. Proc. 99-17. 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 5.04 of Rev. Proc. 99-17.

[6] Section 4 of Rev. Proc. 99-17 states that the election under section 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. A method of accounting for securities subject to the election is impermissible unless the method is in accordance with § 475 and the regulations thereunder. If an electing trader's method of accounting for its taxable year immediately preceding the election year is inconsistent with § 475, the taxpayer is required to change its method of accounting to comply with its election. Thus, a taxpayer that makes a § 475(f) election but fails to change its method of accounting to comply with that election is using an impermissible method.

[7] Section 6.03 of Rev. Proc. 99-17 provides that a taxpayer that changes its method of accounting pursuant to Rev. Proc. 99-17 must take into account the net amount of the § 481(a) adjustment. The § 481(a) adjustment generally is taken into account ratably over four taxable years beginning with the year of change. Section 6.03 of Rev. Proc. 99-17 and § 5 of Rev. Proc. 99-49, superseded by § 5 of Rev. Proc. 2002-9.

[8] Section 301.9100-1(c) of the regulations 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), or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

[9] Sections 301.9100-3(a) through (c)(1)(i) set forth rules that the Internal Revenue Service generally will use to determine whether, under the facts and circumstances of each situation, the Commissioner will grant an extension of time for regulatory elections that do not meet the requirements of § 301.9100-2. Section 301.9100-3(b) provides that subject to paragraphs (b)(3)(i) through (iii) of § 301.9100-3, when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the Service, the taxpayer will be deemed to have acted reasonably and in good faith; and § 301.9100-3(c) provides that the interests of the Government are prejudiced if granting relief would result in the taxpayer having a lower tax liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made (taking into account the time value of money).

[10] Section 301.9100-3(b)(3) provides, in part, that a taxpayer is deemed to have not acted reasonably and in good faith if the taxpayer uses hindsight in requesting relief. If specific facts have changed since the due date for making the election that make the election advantageous to the taxpayer, the Service will not ordinarily grant relief. 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.

[11] Section 301-9100-3(c)(2) provides special rules for accounting method regulatory elections. This section provides, in relevant part, that the interests of the Government are deemed to be prejudiced by granting an extension of time, except in unusual and compelling circumstances, if the accounting method regulatory election is subject to the procedure described in § 1.446-1(e)(3)(i) (requiring the advance written consent of the Commissioner) or 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).

[12] As noted above, § 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. If an electing trader's method of accounting for its taxable year immediately preceding the election year is inconsistent with § 475, the taxpayer is required to change its method of accounting to comply with its election. A taxpayer that makes a § 475(f) election but fails to change its method of accounting to comply with that election is using an impermissible method. Because the election is integrally related to the change in accounting method to mark-to-market, it is an accounting method regulatory election subject to § 301.9100-3(c)(2).

[13] Rev. Proc. 2002-9 provides procedures by which a taxpayer may obtain automatic consent to change to the mark-to-market accounting method. However, the automatic change applies to a taxpayer only if the taxpayer has made a valid election under § 475(f) and is required to change its method of accounting to comply with the election. Section 10A.02(2)(a)(i) of the Appendix to Rev. Proc. 2002-9.

[14] Taxpayer requests an extension of time to make an accounting method regulatory election that is subject to the provisions of § 301.9100-3(c)(2). Because Taxpayer failed to make a timely § 475(f) election pursuant to Rev. Proc. 99-17, the accounting method regulatory election is subject to § 301.9100-3(c)(2)(i). Further, because the accounting method regulatory election requires a § 481(a) adjustment, it is also subject to § 301.9100-3(c)(2)(ii). Therefore, under § 301.9100-3(c)(2), absent unusual and compelling circumstances, a grant of relief is deemed to prejudice the interests of the Government.

[15] Based on the facts and representations submitted, we conclude that Taxpayer has not satisfied the requirements for our granting a reasonable extension of time to make an election under § 475(f) to use the mark-to-market method of accounting. Taxpayer has failed to demonstrate unusual and compelling circumstances regarding Taxpayer's failure to make a timely election sufficient to overcome the presumption of prejudice to the Government's interests.

[16] Taxpayer's request for an extension of time to make the § 475(f) election for the tax year ending Date 1 is denied. Because Taxpayer's request for relief is denied pursuant to § 301.9100-3(c)(2) for lack of unusual and compelling circumstances, it is unnecessary for us to consider Taxpayer's assertion that Taxpayer acted reasonably and in good faith under § 301.9100-3(b), without using hindsight in requesting relief.

[17] No opinion is expressed as to the tax treatment of the transaction under the provisions of any other sections of the Code and regulations, which may be applicable thereto, or the tax treatment of any conditions existing at the time of or effects resulting from the transaction, which are not specifically set forth by the above ruling.

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

Sincerely yours,

ROBERT B. WILLIAMS
Senior Counsel, Branch 3
Office of Associate
Chief Counsel
(Financial Institutions &
Products)