A trader wins an important case in Tax Court about mark-to-market accounting.

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.

Comments

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[school_dubl]

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