T.C. Memo. 2005-167
UNITED STATES TAX COURT
RONALD A. AND CAROL J. LEHRER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2381-04. Filed July 11, 2005.
John Gigounas, for petitioners.
Margaret A. Martin, for respondent.
MEMORANDUM OPINION
HAINES, Judge: This case is before the Court on
respondent’s motion for partial summary judgment pursuant to Rule
121.1 The issue for our consideration is whether petitioners
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and all Rule references
are to the Tax Court Rules of Practice and Procedure. Amounts
are rounded to the nearest dollar.
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made an effective election under section 475(f) on the amendment
to petition.
Background
At the time of the filing of the petition, petitioners
resided in Byron, California.
Petitioners filed Forms 1040, U.S. Individual Income Tax
Return, for 1998, 1999, 2000, and 2001. Before the filing of the
amendment to petition, petitioners did not make an election under
section 475(f) (mark-to-market election) which would make the
election applicable to taxable years 1999, 2000, and 2001 (years
in issue). On their 1999 tax return, petitioners reported
$44,004 of capital gain income. On their 2000 tax return,
petitioners reported on the Schedule D, Capital Gains and Losses,
a net short-term capital loss of $313,715 and subtracted from
income $3,000 as a capital loss. On their 2001 tax return,
petitioners reported a net short-term capital loss of $397,079 on
the Schedule D and subtracted from income $3,000 as a capital
loss.
On November 26, 2003, respondent issued to petitioners a
notice of deficiency which determined that petitioners owed a
deficiency of $650,411 and a penalty pursuant to section 6662(a)
of $130,082 for 1999. On the same date, respondent also issued
to petitioners a notice of deficiency which determined that
petitioners owed a deficiency of $1,013,341 and a penalty
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pursuant to section 6662(a) of $202,668 for 2000, and a
deficiency of $1,240,280 and a penalty pursuant to section
6662(a) of $247,936 for 2001.
On February 10, 2004, petitioners timely filed a petition
with the Court disputing the notices of deficiency for the years
in issue. On November 10, 2004, petitioners filed a motion for
leave to amend petition and proposed amendment pursuant to Rule
41(a). Petitioners requested leave to file an amendment to
petition and stated:
3. The issue raised by the proposed amendment was
recently discovered after numerous conferences with Appeals
and review of Petitioners [sic] records for 2000 and 2001.
The audit for these years was just completed.
4. The question raised in the proposed argument [sic]
is whether Petitioner, Ron Lehrer, was a trader in
securities and, if so, whether the provision of §475(f)
apply [sic] so as to allow ordinary losses as well as
ordinary gains in the years in question.
5. The Amendment of this Petition was recently
discussed with Respondent’s counsel and the Appeals officer.
6. All documents relating to the issue raised in the
proposed amendment have been furnished to Respondent. The
applicability of §475(f) is basically a legal issue.
7. Although it is in the discretion of the Court to
permit amendment of the Petition, the Court should permit
the Petitioners to amend their Petition to raise the issue
because all issues raised in the Notices, except the
negligence penalty, have been settled. The new issue was
recently discovered and, all documents relating to this
issue have been furnished to Respondent.
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On November 22, 2004, we granted petitioners’ motion for
leave to amend petition and filed the amendment to petition which
pleaded, in full, the following:
Petitioners pursuant to leave of this Court,
hereby amend their Petition heretofore filed in this
action as follows:
6(a) Petitioner, Ron Lehrer, was a securities
trader and is entitled to elect the
provisions of §475(f) in order to claim all
his gains and losses as ordinary rather
than capital.
6(b) The election under §475(f) does not have to
be made on a timely filed return.
WHEREFORE, Petitioners pray that the Court hear
this case and determine that there are deficiencies due
for the years in issue resulting from the agreed
adjustments pursuant to a partial settlement agreement
to be filed in this action and, that the Court
determine that there are no penalties due for the years
at issue, and that Petitioner, Ron Lehrer, was a trader
in securities and that the provisions of §475(f) apply
so that all security gains and losses are treated as
ordinary.
On December 2, 2004, the Court granted petitioners leave to
file a second amendment to petition regarding the section 6662(a)
penalty, an issue not relevant to the instant motion. On
December 10, 2004, respondent filed answers to both amendments to
petition, specifically denying the allegations contained in
paragraph 6.
On December 20, 2004, the parties filed a stipulation of
settled issues. The parties stipulated that the only remaining
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issues are whether petitioners are liable for the section 6662(a)
penalties imposed and the applicability of section 475(f).
On January 19, 2005, respondent filed a motion for partial
summary judgment. Respondent moves for partial summary
adjudication in respondent’s favor upon the issue of whether
petitioner Ronald A. Lehrer’s (Mr. Lehrer’s) gains or losses with
respect to securities should be treated as ordinary gains or
losses pursuant to section 475(f). Respondent attached to the
motion petitioners’ tax returns for 1998, 1999, 2000, and 2001.
On January 21, 2005, the Court ordered petitioners to file a
written response to respondent’s motion on or before February 18,
2005. On February 15, 2005, the Court filed petitioners’
response objecting to respondent’s motion for partial summary
judgment.
Discussion
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Rule 121(a) provides that
either party may move for summary judgment upon all or any part
of the legal issues in controversy. The Court may grant full or
partial summary judgment when there is no genuine issue of
material fact and a decision may be rendered as a matter of law.
Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520
(1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v.
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Commissioner, 90 T.C. 753, 754 (1988). We conclude that there is
no genuine issue of material fact regarding the question raised
in respondent’s motion for partial summary judgment, and a
decision of that question may be rendered as a matter of law.
Respondent argues that even if Mr. Lehrer was a “trader in
securities” during the years in issue, he failed to make an
effective mark-to-market election pursuant to Rev. Proc. 99-17,
1999-1 C.B. 503. Petitioners concede that they did not make a
mark-to-market election on their tax returns but argue that an
effective mark-to-market election was made on their first
amendment to petition to this Court. Further, petitioners argue
that Rev. Proc. 99-17, supra, lacks “precedential value as it
simply announces the Service’s position.”
A taxpayer engaged in a trade or business as a trader in
securities is eligible to elect to recognize gain or loss on any
security held in connection with his trade or business at the
close of the taxable year as if the security were sold for its
fair market value at yearend. Sec. 475(f)(1)(A)(i);2 see Chen v.
2
SEC. 475(f). Election of Mark to Market for Traders in
Securities or Commodities.--
(1) Traders in securities.--
(A) In general.--In the case of a person who is
engaged in a trade or business as a trader in
securities and who elects to have this paragraph apply
to such trade or business--
(continued...)
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Commissioner, T.C. Memo. 2004-132. In general, any gains or
losses resulting from the mark-to-market election shall be
treated as ordinary income or loss. Sec. 475(d)(3)(A),
(f)(1)(D). If a taxpayer is in the business as a trader in
securities and made a mark-to-market election with respect to
sales of securities held in connection with his business, his net
loss from that business would be an ordinary loss, deductible in
full under section 165; if the mark-to-market election is not
made, the net loss would be a capital loss deductible only to the
extent of any capital gains plus $3,000. See secs. 165(a), (c),
(f), 1211(b)(1); Chen v. Commissioner, supra.
In Chen we held that the taxpayer was not a “trader in
securities” for the relevant year for purposes of section 475(f)
and, therefore, did not address the taxpayer’s argument regarding
whether he should be permitted to make an untimely, retroactive
mark-to-market election because section 475(f) was not available
to him. As a result, we are presented with a novel issue:
whether an allegation contained in an amendment to petition
qualifies as an effective mark-to-market election.
2
(...continued)
(i) such person shall recognize gain or loss
on any security held in connection with such trade
or business at the close of any taxable year as if
such security were sold for its fair market value
on the last business day of such taxable year, * *
*
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With regard to making the mark-to-market election, section
475(f)(3) provides:
(3) Election.--The elections under paragraphs (1)
and (2) may be made separately for each trade or
business and without the consent of the Secretary.
Such an election, once made, shall apply to the taxable
year for which made and all subsequent taxable years
unless revoked with the consent of the Secretary.
The statute and regulations do not provide procedures that
specify the time and manner to make a mark-to-market election.3
We look to the legislative history of section 475 to
determine congressional intent because the statute is silent as
to the procedures which must be followed to make a mark-to-market
election. Ewing v. Commissioner, 118 T.C. 494, 503 (2002)
(citing Burlington N.R.R. Co. v. Okla. Tax Commn., 481 U.S. 454,
461 (1987)); see Wells Fargo & Co. v. Commissioner, 120 T.C. 69,
89 (2003); Allen v. Commissioner, 118 T.C. 1, 7 (2002). The
legislative history states that “The election will be made in the
time and manner prescribed by the Secretary of the Treasury and
will be effective for the taxable year for which it is made and
all subsequent taxable years, unless revoked with the consent of
the Secretary.” See H. Conf. Rept. 105-148, at 446 (1997), 1997-
4 C.B. (Vol. 1) 323, 768. Thus, the Secretary has authority to
prescribe the time and manner of the election.
3
The Commissioner issued proposed regulations on Jan. 28,
1999. Sec. 1.475(f)-1, Proposed Income Tax Regs., 64 Fed. Reg.
4378 (Jan. 28, 1999).
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Under this authority, the Commissioner issued Rev. Proc. 99-
17, 1999-1 C.B. 503, which provides the procedure for taxpayers
to make a mark-to-market election. Generally, Rev. Proc. 99-17,
sec. 5, 1999-1 C.B. at 504-505, provides that the taxpayer must
file a statement which describes 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. This statement
must be filed not later than the due date of the Federal income
tax return (without regard to extensions) for the taxable year
immediately preceding the election year and must be attached to
that tax return or to a request for an extension of time to file
that return. Id.
The fact that petitioners did not file any statements with
their tax returns for the years immediately preceding the years
in issue (i.e., 1998, 1999, and 2000) would indicate that a mark-
to-market election was not made. Therefore, we conclude that
petitioners did not make a mark-to-market election in compliance
with Rev. Proc. 99-17, supra, to affect the years in issue.4
The salient fact is that petitioners attempted to file a
mark-to-market election by amending their petition long after the
4
Rev. Proc. 99-17, 1999-1 C.B. 503, also requires that the
taxpayer obtain the consent of the Commissioner to change his
method of accounting to mark-to-market accounting. Id., sec. 5,
1999-1 C.B. at 504-505. We make no decision on the applicability
of this requirement because the issue in the instant case is
resolved by petitioners’ failure to meet the due date of the
mark-to-market election.
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due dates of their tax returns for the years in issue. In the
meanwhile, respondent had audited those returns without
disturbing petitioners’ characterization of the gains and losses
from securities transactions as capital and had determined
deficiencies in petitioners’ income taxes, prompting the petition
to this Court. Even assuming arguendo that we did not look to
the revenue procedure for guidance, we would still conclude that
the mark-to-market election on the amendment to petition was made
so late that petitioners are not entitled to abandon the valid
method for reporting capital gains and losses on their tax
returns. Cf. Pac. Natl. Co. v. Welch, 304 U.S. 191, 194-195
(1938) (change from method used on return for reporting gain on
sale to installment method “would require recomputation and
readjustment of tax liability for subsequent years and impose
burdensome uncertainties upon the administration of the revenue
laws”); Wierschem v. Commissioner, 82 T.C. 718, 722-724 (1984).
Therefore, we conclude that there is no genuine issue of
material fact that petitioners did not make an effective mark-to-
market election on the amendment to petition to avail themselves
of the benefits of section 475(f). As a result, respondent’s
motion for partial summary judgment will be granted.
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To reflect the foregoing,
An order will be issued
granting respondent’s motion for
partial summary judgment.