L.S. Vines, (May 11, 2006) 126 TC No. 15.
The Tax Court reversed the IRS denial of a taxpayer's private letter ruling request for an extension on filing a mark-to-market accounting election IRC 475(f). The Tax Court said the taxpayer acted reasonably and in good faith and the IRS's interests won't be prejudiced.
Chalk up one big Tax Court victory for business traders in
dealing with the IRS and this may help turn the tide in favor of business
traders in future dealings with the IRS.
What’s this Tax Court case all about?
Many traders missed the April 15 due date for the current year mark-to-market (MTM) IRC 475(f) election. Without MTM, traders are stuck with "capital loss" treatment and cannot deduct their trading losses as "ordinary losses." This significantly reduces a trader’s opportunity for net operating loss refunds.
If you act by Oct. 15, you may be able to receive an extension of time to
file your current year MTM election. Reg § 301.9100-1 "Extensions of time
to make elections" provides relief for late elections. Note the maximum
extension period is six months. The MTM election due date was April 15, so the
extended due date is Oct. 15.
To file the MTM extension, a trader needs to file a private letter ruling (PLR)
to elect mark-to-market accounting (MTM) IRC 475 within six months of the
election deadline.
Before this latest Tax Court victory, we used to say the
following: The PLR procedure is painstaking and expensive, and for traders
seeking relief to use MTM, the chance of success is extremely small. To date,
the IRS website has published only a few PLRs for traders seeking to use MTM,
and the IRS has denied all of these PLRs.
Hurray! This recent Tax Court case victory overturns the IRS, and the Tax Court
goes further in chiding the IRS to do a better job in defining the PLR
requirements for MTM extensions.
The Tax Court tells
the IRS to better define things.
In the Vines TC ruling, the Tax Court instructed the IRS to
better define their rules for MTM election extensions using PLRs.
The court further indicated the IRS no longer may overplay their “prejudice”
argument to deny extension requests, which has been the case to date for all
such IRS rulings on the subject.
In this writer’s opinion, the prejudice argument can be
structurally flawed. Consider that almost every taxpayer request involves a
refund; doesn’t that prejudice the government’s position?
It must be prejudice with hindsight.
This case better defines the law. Prejudice alone is not
enough; hindsight by the taxpayer must be established by the IRS.
Here is an example of clear taxpayer hindsight that would prejudice the
government’s position.
A trader has trading gains for the year-to-date period ending April 15, the
date when the MTM election is due. The trader figures he does not need MTM and
decides to skip the MTM election on the due date. The trader goes on to lose
prior gains and then figures he can benefit from MTM for the entire tax year.
The trader files an MTM extension filing using the PLR process before the due
date of October 15.
In this example, the IRS can easily argue that the trader, using hindsight,
changed his mind, and the government’s position is prejudiced with that
hindsight.
Note that the Vines case is the reverse of the above
example. Vines did not trade after April 15; he lost his money before April 15.
Therefore, Vines did not use hindsight.
There are other
factors that come into play as well.
Reading between the lines of this Tax Court decision may provide additional leeway to traders in seeking MTM extension filings.
Unless a taxpayer clearly appears to be using hindsight to
prejudice the government’s case, there may be more room to win relief filings.
We recommend that you consult with our firm to study your case and determine the best options to proceed. Learn more about private letter rulings for this type of relief here: http://www.greencompany.com/EducationCenter/GTTRecMTMprivateletterruling.shtml.
We may be able to develop a winning strategy for your case.
If we feel you don’t have a winning case for a private
letter ruling for late MTM election relief, consider achieving MTM in other
ways.
For example, you may form a new entity like an LLC, which is a “new taxpayer”
and may elect MTM internally within 75 days of inception, but that election
will apply for the balance of the tax year only.
Consider also a defacto husband-wife general partnership, which may apply from the start of the tax year. Learn more about entities for traders here: http://www.greencompany.com/Traders/TraderEntities.shtml.
If you have any questions about MTM, MTM extensions, private letter rulings, or entities, email us at info@greencompany.com, or call us at 877-662-2014 (toll-free) or 646-216-8061.
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