126 T.C. No. 15
UNITED STATES TAX COURT
L.S. VINES, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12763-04. Filed May 11, 2006.
P, a lawyer for over 34 years, settled a class
action law suit during 1999 and received compensation
for his legal services. P received approximately half
of the compensation in taxable year 1999 and half in
taxable year 2000 and reported it as ordinary income
for the respective taxable years. P decided to leave
the practice of law and begin a business of trading
securities. After P failed to cover a margin call, P’s
brokerage accounts were liquidated on Apr. 14, 2000,
resulting in a short-term capital loss. Throughout his
career, P relied on accountants for tax advice. When P
filed for an extension of time to file his 1999 tax
return on Apr. 17, 2000, P did not elect the mark-to-
market method of accounting pursuant to sec. 475(f),
I.R.C., because P’s accountant was not aware of the
mark-to-market election for securities traders or any
related revenue procedure. In June 2000, P learned of
the mark-to-market election for securities traders from
a friend, obtained the citation of sec. 475(f), I.R.C.,
and learned that Rev. Proc. 99-17, 1999-1 C.B. 503,
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required the election to be filed no later than the due
date for the previous year’s tax return; i.e., Apr. 17,
2000. P then employed a law firm to file the election
and a request for relief pursuant to sec. 301.9100-
3(c), Proced. & Admin. Regs. On July 21, 2000, the law
firm submitted the election on P’s behalf. P did not
trade any securities, realize any further gains, or
suffer any further losses between Apr. 17 and July 21,
2000. P’s losses were exactly the same on July 21,
2000, as they were on Apr. 17, 2000. In a Private
Letter Ruling, dated Dec. 5, 2001, R denied P’s request
for an extension of time to file the election pursuant
to sec. 301.9100-3(c), Proced. & Admin. Regs.
Subsequently, R determined deficiencies in tax for P’s
taxable years 1999 and 2000.
Held: P is entitled to an extension of time to
file his sec. 475(f), I.R.C., election pursuant to sec.
301.9100-3, Proced. & Admin. Regs. P is entitled to
relief because he acted reasonably and in good faith
and the interests of the Government will not be
prejudiced. Accordingly, P is entitled to the benefits
of sec. 475(f), I.R.C., for the taxable year 2000 as if
he had timely filed the election.
David D. Aughtry, Roy J. Crawford, and Hale E. Sheppard, for
petitioner.
Monica D. Armstrong, for respondent.
WELLS, Judge: Respondent determined deficiencies in tax for
petitioner’s 1999 and 2000 taxable years of $6,312,641 and
$6,835,942, respectively.1 The issue we decide is whether,
pursuant to section 301.9100-3, Proced. & Admin. Regs.,
petitioner should be granted an extension of time to file a
1
Respondent contends that petitioner in not entitled to
certain deductions for meals and entertainment for taxable year
1999, gifts to employees for taxable year 1999, and alimony
payments for taxable year 2000 all of which petitioner concedes.
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section 475(f) election for his taxable year 2000. 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.
FINDINGS OF FACT
Some of the facts and certain exhibits have been stipulated.
The parties’ stipulations of fact are incorporated in this
Opinion by reference and are found as facts in the instant case.2
At the time of filing the petition, petitioner resided in
Birmingham, Alabama. Petitioner is an attorney who practiced
personal injury law in Birmingham, Alabama, for approximately 34
years. During January 1994, petitioner began representing
certain plaintiffs in a national class action lawsuit that
settled with the defendants during 1999. Petitioner received
approximately one-half of his compensation for settling the class
action suit during the taxable year 1999 and the other half
during the taxable year 2000. Petitioner reported net profits of
$18,520,775 and $16,966,055 from his law practice on line 29 of
Schedule C, Profit or Loss From Business, of his Forms 1040, U.S.
Individual Income Tax Return, for taxable years 1999 and 2000,
respectively.
2
The instant case was tried in the Court’s Electronic
(North) Courtroom where evidence was presented electronically and
certain testimony was taken by video conference. In addition to
the usual paper format, the parties filed briefs on CD Rom.
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During August 1999, petitioner established brokerage
accounts with DLJdirect and Ameritrade for the purpose of
investing a portion of his compensation from settling the class
action suit. Petitioner deposited $5 million in each of those
accounts. Petitioner later established a brokerage account with
Terra Nova during December 1999.
During the fall of 1999, petitioner decided to wind down his
law practice and begin a new career as a securities trader.
Previously, petitioner had traded in the stock market only
irregularly. Between December 1999 and January 2000, petitioner
concluded the class action suit, transferred his remaining cases
to other attorneys, paid off the balance of the lease of his
downtown-Birmingham law office, and terminated the lease. By
late January 2000, petitioner had spent a substantial amount of
money equipping and organizing one floor of his home as a
securities trading office. Based on the volume and frequency of
petitioner’s trading, the parties have stipulated that petitioner
became engaged in the trade or business of trading securities on
January 28, 2000.
Petitioner used margin borrowing as part of his securities
trading strategy. On April 14, 2000, DLJdirect forced the
liquidation of petitioner’s entire account and terminated
petitioner’s trading on account of petitioner’s failure to cover
a margin call after technology stocks declined sharply during
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early April, 2000. As of April 14, 2000, petitioner’s net
trading losses totaled $25,196,151.54. After his account was
liquidated on April 14, 2000, petitioner held no securities in
his DLJdirect, Ameritrade, or Terra Nova accounts.
Throughout his career, petitioner used certified public
accountants to advise him on Federal tax matters and to prepare
his Federal tax returns. J. Wray Pearce (Mr. Pearce), a
certified public accountant with over 30 years of experience, had
served as petitioner’s business and personal accountant for over
13 years. Mr. Pearce had visited petitioner’s home several times
and was very familiar with petitioner’s securities trading
business. He had seen all of petitioner’s trading-related
computers and equipment, helped hire some of the employees in
petitioner’s securities trading business, and reviewed daily
calculations of petitioner’s securities trading.
On April 13, 2000, Mr. Pearce met with petitioner to obtain
his signature on Form 4868, Application for Automatic Extension
of Time to File U.S. Individual Income Tax Return, for the
taxable year 1999. On April 17, 2000, petitioner timely filed
Form 4868, requesting an extension until August 15, 2000, to file
his return for taxable year 1999. A section 475(f) election was
not enclosed with the Form 4868. Because Mr. Pearce did not know
about the applicability of section 475(f) or any related Internal
Revenue Service (IRS) revenue procedure to securities traders,
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Mr. Pearce did not advise petitioner of the availability of a
section 475(f) election.
On or about June 4, 2000, Dr. James G. Sullivan (Dr.
Sullivan), a friend of petitioner, visited petitioner at his
home. Dr. Sullivan had helped petitioner set up the computers
that petitioner used to conduct his securities trading business.
During Dr. Sullivan’s June visit, petitioner told Dr. Sullivan
that he had suffered significant losses during the first quarter
of the 2000 taxable year and that, consequently, his DLJdirect
account had been liquidated on April 14, 2000. Dr. Sullivan knew
several professional “day traders” and informed petitioner that
he might be able to deduct his security losses as ordinary
losses. Before Dr. Sullivan’s June visit, petitioner had no
indication that petitioner might be able to claim ordinary losses
for his securities trading business.
On the next day, June 5, 2000, petitioner attempted to
contact another accountant, Charles E. Sellers (Mr. Sellers),
regarding the possibility of deducting his losses as a securities
trader. On June 6, 2000, petitioner spoke with Mr. Sellers by
telephone and told him that Dr. Sullivan had suggested that
petitioner might be able to deduct his losses as a securities
trader as ordinary losses. At the time of petitioner’s
telephone conversation with Mr. Sellers, Mr. Sellers was unaware
of section 475(f) and the mark-to-market election available to
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securities traders. Petitioner then spoke with Dr. Sullivan by
telephone and asked Dr. Sullivan for a citation of the exact
provision that would allow securities traders to deduct their
losses as ordinary losses. Dr. Sullivan checked with his day-
trader contacts, who gave him a citation of section 475(f). Dr.
Sullivan relayed the citation to petitioner, who in turn relayed
it to Mr. Sellers.
Mr. Sellers informed petitioner that, according to Rev.
Proc. 99-17, 1999-1 C.B. 503, in order for a section 475(f)
election to be effective for the 2000 taxable year, petitioner
had to file the election by April 17, 2000, the due date for his
1999 tax return. Mr. Sellers then informed petitioner that he
should qualify for an extension of time within which to make the
section 475(f) election under section 301.9100-3, Proced. &
Admin. Regs. (section 9100 relief).3
Mr. Sellers recommended that petitioner hire other tax
counsel to make the section 475(f) election and to request
section 9100 relief. Petitioner hired the Washington, D.C., law
firm of Caplin & Drysdale to prepare and file the section 475(f)
election and request for section 9100 relief. On July 21, 2000,
Caplin & Drysdale, on behalf of petitioner, submitted to
respondent a “Taxpayer Election of Mark to Market Accounting
Under Section 475(f)” (section 475(f) election), along with a
3
Sec. 9100 relief is discussed in detail infra.
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six-page letter outlining the reasons petitioner should qualify
for section 9100 relief to make the section 475(f) election for
the taxable year 2000. The letter also stated that petitioner
would file a formal private letter ruling request. Also enclosed
with the section 475(f) election and the six-page letter was a
“protective” Form 3115, Application for Change in Accounting
Method.
The Form 3115 stated that petitioner intended to adopt an
accounting method for his new securities-trading business, not
change an accounting method for an existing business. An
attachment to the Form 3115 stated in pertinent part:
The taxpayer desires to adopt a new method of
accounting for securities which are held in connection
with his trade or business as a trader in securities to
the mark to market method of recognizing gains and
losses as described in Section 475(f).
* * * * * * *
The taxpayer is not requesting any change in the
accounting methods used in his trade or business as an
attorney and since the year 2000 is his first year in
the trade or business of trading securities he is
adopting a mark to market accounting method with regard
to his trade or business of trading securities.
* * * * * * *
The taxpayer does not have to make any section 481(a)
adjustment because he was not engaged in the trade or
business of being a trader in securities prior to the
year 2000. He is adopting a mark to market method of
accounting for his trade or business as a securities
trader which did not begin until 2000.
* * * * * * *
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Based on the limited number of securities transactions
in 1999 as set forth above and since [petitioner] was
still engaged in the full time practice of law for all
of 1999, it seems clear that he did not qualify as a
trader in securities in 1999 and therefore has not
adopted a method of accounting for his trade or
business as a securities trader in any year prior to
2000. For this reason, there is no adjustment under
section 481(a).
Caplin & Drysdale advised petitioner that he had bound
himself to adopt the mark-to-market method of accounting for his
trading business by filing the section 475(f) election and the
protective Form 3115 and requesting section 9100 relief on
July 21, 2000. On that basis, Caplin & Drysdale advised
petitioner that he could resume his securities trading activities
without adversely affecting his request for section 9100 relief.
Mr. Sellers gave petitioner the same advice. Based on Caplin &
Drysdale’s and Mr. Sellers’ advice, petitioner resumed his
trading activities on July 26, 2000.
Between the date that petitioner should have filed his
section 475(f) election, April 17, 2000, and the date petitioner
actually filed his section 475(f) election, July 21, 2000,
petitioner: (1) Did not purchase any publicly-traded stock; (2)
did not sell any publicly traded stock; and (3) had no gain or
loss from the disposition of any publicly traded stock. Thus,
petitioner’s losses on July 21, 2000, were exactly the same as
they were on April 17, 2000.
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On October 27, 2000, Caplin & Drysdale submitted to
respondent on behalf of petitioner a formal private letter ruling
request seeking section 9100 relief for his 2000 section 475(f)
election (section 9100 relief request). Respondent required
petitioner to pay a $5,000 fee to file the section 9100 relief
request.
When petitioner filed his section 9100 relief request on
October 27, 2000, the 2000 taxable year had not yet closed and
petitioner’s tax return for the 2000 taxable year was not yet
due. Respondent had not imposed any accuracy-related penalty
under section 6662 with respect to either the 1999 or 2000
taxable year.
On January 17, 2001, petitioner filed his Form 1040 for his
2000 taxable year, reporting all items based on the assumption
that his section 9100 relief request would be granted.
Petitioner reported a net loss of $26,768,761 from his securities
trading business on Schedule C of his Form 1040, attached Form
8275, Disclosure Statement, regarding his section 475(f)
election, and also attached a copy of the section 475(f) election
filed on July 21, 2000.4
4
Respondent’s technical case history indicates that
respondent told petitioner’s representative during a telephone
conference on Mar. 26, 2001, that “the Form 3115 and statement
are not binding on us and that he should tell the taxpayer to
file a protective election for 2001.” The technical case history
also indicates that, during a separate telephone conference on
(continued...)
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Following an adverse private letter ruling request
conference on September 25, 2001, respondent’s Office of Chief
Counsel (Financial Institutions & Products) issued a conference
report dated October 19, 2001, stating in pertinent part as
follows:
For basically administrative reasons, we were forced to
allow 3½ months of hindsight, but if we had the choice,
we would not have allowed one day of hindsight.
* * * * * * *
We did anticipate that taxpayers would not be able to
use 9100 relief to obtain additional time to file the
election.
4
(...continued)
Apr. 6, 2001, respondent told petitioner’s representative: “If
* * * [petitioner] is not granted section 9100 relief, he has to
make the election and follow the procedures for making the
election for year 2001 - So [petitioner] should think about a
protective election.”
At the time respondent advised petitioner’s representative
to file a protective election for taxable year 2001, petitioner
had already filed his tax return for his 2000 taxable year on
Jan. 17, 2001. On Apr. 11, 2001, petitioner filed a document
captioned “Taxpayer Protective Election for Mark to Market
Accounting under Section 475(f)” for taxable year 2001.
On Oct. 17, 2001, petitioner filed a Form 1040X, Amended
U.S. Individual Income Tax Return. The Form 1040X made no
changes to petitioner’s income or deductions but had attached to
it a Form 3115, Application for Change of Accounting Method,
which petitioner had not attached to the tax return he filed on
Jan. 17, 2001, or the protective sec. 475(f) election he filed
on Apr. 11, 2001.
The parties also dispute whether petitioner properly made a
valid sec. 475(f) election for his 2001 taxable year. We do not
reach that issue because, for reasons stated below, we hold that
petitioner is entitled to a sec. 475(f) election for his 2000
taxable year.
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* * * * * * *
We would have done a regulation project if we had not
believed section 301.9100-3 would prevent taxpayers
from filing late elections.
* * * * * * *
The drafters of Rev. Proc. 99-17 did not want 9100
relief to be available for 475(f) elections.
On December 4, 2001, respondent’s Office of Chief
Counsel issued a section 301.9100-3, Proced & Admin. Regs.,
file memo stating in pertinent part as follows:
Did the taxpayer apply for relief before the failure to
make the election was discovered by the Service (see §
301.9100-3(b)(1)(i))?[5] Yes.
* * * * * * *
Is the taxpayer considered to have acted reasonably and
in good faith, taking into account § 301.9100-
3(b)(3)(i)-(iii)?[6]
* * * * * * *
It is unnecessary to reach conclusions pertaining to
sections 301.9100-3(b)(3)(i)-(iii) due to the
taxpayer’s failure to satisfy the requirements under
section 301.9100-3(c)(2).[7]
5
Sec. 301.9100-3(b)(1)(i)-(v), Proced. & Admin. Regs.,
discussed more fully below, lists five criteria, under any one of
which the taxpayer is deemed to have acted reasonably and in good
faith.
6
Sec. 301.9100-3(b)(3)(i)-(iii), Proced. & Admin. Regs.,
discussed more fully below, lists five criteria, under any one of
which the taxpayer is deemed not to have acted reasonably and in
good faith.
7
Sec. 301.9100-3(c)(2), Proced. & Admin. Regs., provides
special rules for accounting method regulatory elections, which
(continued...)
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On November 2, 2001, petitioner filed a Form 1045,
Application for Tentative Refund, for his 2000 taxable year,
claiming a $4,030,143 decrease in income tax for taxable year
1999 on account of a claimed net operating loss carryback of
$9,880,708 from his 2000 taxable year.8
On November 2, 2001, petitioner also filed a Form 1040X,
Amended U.S. Individual Income Tax Return, for his 1999 taxable
year to reflect the claimed net operating loss carryback of
$9,880,708 from his 2000 taxable year, as well as a net operating
loss carryover of $571,238 from his 1998 taxable year. The
amended return reflected a total tax of $3,049,864.
On December 5, 2001, respondent denied petitioner’s section
9100 relief request in Priv. Ltr. Rul. 129057-00 (200209053),
stating in pertinent part as follows:
Because Taxpayer’s request for relief is denied
pursuant to section 301.9100-3(c)(2) for lack of
unusual and compelling circumstance, it is unnecessary
for us to consider Taxpayer’s assertion that he acted
reasonably and in good faith under section 301.9100-
3(b), without using hindsight in requesting relief.
* * *
7
(...continued)
presume prejudice to the interests of the Government absent
unusual and compelling circumstances. The application of sec.
301.9100-3(c)(2), Proced. & Admin. Regs., is a central issue in
the instant case and is discussed in greater detail below.
8
Respondent later denied petitioner’s refund request.
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OPINION
The issue we decide is whether, pursuant to section
301.9100-3, Proced. & Admin. Regs., petitioner should be granted
an extension of time to file a section 475(f) election for his
taxable year 2000. Section 475(f) provides as follows:
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--
(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, and
(ii) any gain or loss shall be taken into
account for such taxable year.
Proper adjustment shall be made in the amount of any
gain or loss subsequently realized for gain or loss
taken into account under the preceding sentence. The
Secretary may provide by regulations for the
application of this subparagraph at times other than
the times provided in this subparagraph.
In general, section 475(f) allows a taxpayer engaged in a
trade or business as a securities trader to elect the mark-to-
market method of accounting. After making the election, the
taxpayer must recognize gain on or loss on any security held in
connection with the securities trading business as if the
security were sold for its fair market value on the last business
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day of the taxable year. Any gain or loss must be taken into
account in that year. Sec. 475(f)(1)(A)(i).
If a qualified taxpayer makes a section 475(f) election, the
gain or loss on the sale or disposition of a security is treated
as ordinary income or loss. Sec. 475(d)(3)(A)(i), (f)(1)(D).
Accordingly, if petitioner is entitled to make the election, he
would be able to apply and carry back his losses from his
securities trading business to offset the ordinary income he
received as compensation for settling the class action lawsuit.
On the other hand, if a taxpayer fails to make the section 475(f)
election, gain or loss from the sale or disposition of a security
is treated as capital gain or loss. See secs. 1221(a) and 1222.
Capital losses for individuals are subject to the capital loss
limitations under section 1211(b), which provides that capital
losses are allowed only to the extent of capital gains, plus
$3,000. Petitioner has $35,486,830 in ordinary income from his
law practice and $26,768,761 in short-term capital losses from
his securities trading business.
The parties have stipulated that petitioner was engaged in a
trade or business as a securities trader by January 28, 2000.
Accordingly, the parties do not dispute whether petitioner is
qualified to make a section 475(f) election; their primary
dispute is whether petitioner should be allowed the benefit of
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section 9100 relief to extend the time to make the section 475(f)
election.
Respondent relies on Rev. Proc. 99-17 sec. 5.03, 1999-1 C.B.
503, 504, which states in pertinent part as follows:
SECTION 5. PROCEDURES FOR MAKING THE MARK-TO-MARKET
ELECTIONS
* * * * * * *
.03 Elections effective for a taxable year beginning on
or after January 1, 1999.
(1) General procedure. * * * for a taxpayer to
make a § 475(e) or (f) election that is effective
for a taxable year beginning on or after January
1, 1999, the taxpayer must file a statement that
satisfies the requirements in section 5.04 of this
revenue procedure. The statement must be filed
not 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 and must be attached either to
that return or, if applicable, to a request for an
extension of time to file that return. [Emphasis
added.]
Accordingly, respondent contends that, pursuant to Rev. Proc. 99-
17 sec. 503, petitioner was required to file his section 475(f)
election by April 17, 2000, the due date for his 1999 tax return.
Petitioner contends that he should be allowed the benefit of
section 9100 relief to extend the time to make the section 475(f)
election because he acted reasonably and in good faith and the
interests of the Government will not be prejudiced.9
9
Petitioner also contends that Rev. Proc. 99-17, 1999-1 C.B.
503, is invalid and unlawful because the plain language of sec.
(continued...)
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Respondent contends that petitioner should not be allowed section
9100 relief to extend the time to make the section 475(f)
election because an election of the mark-to-market method of
accounting under section 475(f) is an accounting method
regulatory election.10 According to respondent, section 9100
relief is not available because section 301.9100-3(c)(2), Proced.
& Admin. Regs., presumes the interests of the Government to be
prejudiced, absent unusual and compelling circumstances not
present in the instant case. Respondent contends that, if
petitioner is permitted an extension of time to make the section
475(f) election, it impermissibly will give petitioner the
benefit of “hindsight”.
The interpretation of section 301.9100-3(c), Proced. &
Admin. Regs., and the parties’ arguments regarding section 9100
relief create issues of first impression in this Court. We begin
9
(...continued)
475(g) compels the Commissioner to issue regulations outlining
the procedures for making the sec. 475(f) election, which the
Commissioner did not do, and cites Zinniel v. Commissioner, 89
T.C. 357 (1987), affd. 883 F.2d 1350 (7th Cir. 1989), in support
of his position.
Because we hold, for reasons stated below, that petitioner
is entitled to sec. 9100 relief, we do not need to decide
questions relating to the validity of the limitations set forth
in Rev. Proc. 99-17, supra.
10
See sec. 301.9100-1(b), Proced. & Admin. Regs.,
(“Regulatory election means an election whose due date is
prescribed by a regulation published in the Federal Register, or
a revenue ruling, revenue procedure, notice, or announcement
published in the Internal Revenue Bulletin”.).
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our analysis of section 301.9100-3(c), Proced. & Admin. Regs.,
keeping in mind the following policies stated by the Secretary in
the preamble to the final regulations:
There are two policies that must be balanced in
formulating the standards for § 301.9100 relief. The
first is the policy of promoting efficient tax
administration by providing limited time periods for
taxpayers to choose among alternative tax treatments
and encouraging prompt tax reporting. The second is
the policy of permitting taxpayers that are in
reasonable compliance with the tax laws to minimize
their tax liability by collecting from them only the
amount of tax they would have paid if they had been
fully informed and well advised. [T.D. 8742, 1998-1
C.B. 388, 389.11]
Section 301.9100-3(a), Proced. & Admin. Regs., provides in
pertinent part as follows:
§ 301.9100-3. Other Extensions–(a) In general.--
* * * Requests for relief subject to this section will
be granted when the taxpayer provides the evidence * *
* to establish to the satisfaction of the Commissioner
11
The Secretary also expressed this view in the preamble to
temporary/proposed sec. 301.9100 regulations, T.D. 8680, 1996-2
C.B. 194, which states: “The regulations provide a means by
which taxpayers can be in the same position they would have been
in had they made their elections in a timely manner.”
This view was also endorsed by Annette Smith, Tax
Legislative Counsel, in the hearing on temporary/proposed sec.
301.9100 regulations, T.D. 8680, 1996-2 C.B. 194, where she
stated:
I would agree that the 9100 policy should be to try to
put a taxpayer back in the same position they would
have been had they made a timely election, and I think
that policy’s based on the fact that there can be
significant consequences to a taxpayer who’s qualified
to make an election and fails to make it timely.
[Reprinted in Tax Notes Today, 96 TNT 216-16 (Oct. 30,
1996).]
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that the taxpayer acted reasonably and in good faith,
and that the grant of relief will not prejudice the
interests of the Government. [Emphasis added.]
Accordingly, the Commissioner must grant relief if the taxpayer
provides evidence establishing to the Commissioner’s satisfaction
that two conditions are satisfied: (1) The taxpayer acted
reasonably and in good faith, and (2) the interests of the
Government will not be prejudiced by granting relief.
In denying petitioner’s request for section 9100 relief,
respondent, in Priv. Ltr. Rul. 129057-00, stated the following:
Because taxpayer’s request for relief is denied
pursuant to section 301.9100-3(c)(2) for lack of
unusual and compelling circumstances, it is unnecessary
for us to consider Taxpayer’s assertion that he acted
reasonably and in good faith under section 301.9100-
3(b), without using hindsight in requesting relief.
* * *[12]
Respondent’s contentions in the instant case are consistent with
respondent’s conclusions in Priv. Ltr. Rul. 129057-00. We
disagree with respondent. We conclude that petitioner acted
reasonably and in good faith and that the interests of the
Government are not prejudiced by allowing petitioner to file a
late election.
12
Respondent’s Chief Counsel 9100 File Memo. also states:
“It is unnecessary to reach conclusions pertaining to sections
301.9100-3(b)(3)(i)-(iii) [whether petitioner acted reasonably
and in good faith] due to the taxpayer’s failure to satisfy the
requirements under sec. 301.9100-3(c)(2).”
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Section 301.9100-3(b)(1), Proced. & Admin. Regs., defines
reasonableness and good faith as follows:
(b) Reasonable action and good faith.-- (1) In
general.-- Except as provided in paragraphs (b)(3)(i)
through (iii) of this section, a taxpayer is deemed to
have acted reasonably and in good faith if the
taxpayer–
(i) Requests relief under this section before the
failure to make the regulatory election is
discovered by the Internal Revenue Service (IRS);
(ii) Failed to make the election because of
intervening events beyond the taxpayer’s control;
(iii) Failed to make the election, because after
exercising reasonable diligence (taking into
account the taxpayer’s experience and the
complexity of the return or issue), the taxpayer
was unaware of the necessity for the election;
(iv) Reasonably relied on the written advice of
the Internal Revenue Service (IRS); or
(v) Reasonably relied on a qualified tax
professional, including a tax professional
employed by the taxpayer, and the tax professional
failed to make, or advise the taxpayer to make,
the election. [Emphasis added.]
The benchmarks for reasonableness and good faith in section
301.9100-3(b)(1), Proced. & Admin. Regs., are disjunctive; i.e.,
the taxpayer need satisfy only subdivision (i), (ii), (iii),
(iv), or (v) in order to be deemed to have acted reasonably and
in good faith. In the instant case, petitioner satisfies at
least three of the regulation’s benchmarks.
Regarding section 301.9100-3(b)(1)(i), Proced. & Admin.
Regs., there is no question that petitioner requested relief
- 21 -
before respondent discovered the failure to make the section
475(f) election. Regarding section 301.9100-3(b)(1)(iii),
Proced. & Admin. Regs., pertaining to the exercise of reasonable
diligence, we note that while petitioner had practiced law for
over 30 years, he had only been in business as a securities
trader for approximately 3 months at the time respondent contends
he should have made his section 475(f) election; i.e., April 17,
2000. Within a day of learning of the section 475(f) election
from Dr. Sullivan, petitioner contacted a new accountant, Mr.
Sellers. Mr. Sellers was also unaware of section 475(f), but
petitioner retrieved the citation of section 475(f) from Dr.
Sullivan and provided it to Mr. Sellers. Petitioner also
immediately hired Caplin & Drysdale to file the section 475(f)
election and request section 9100 relief.
Regarding section 301.9100-3(b)(1)(v), Proced. & Admin.
Regs., which finds good faith where the taxpayer acts in
reasonable reliance upon counsel, petitioner was a personal
injury lawyer for over 34 years, not a tax lawyer, and relied on
accountants for tax advice throughout his professional career.
In relying on Mr. Pearce, petitioner had no reason to question
Mr. Pearce’s qualifications as a qualified tax professional.13
13
We note that, although whether petitioner’s reliance was
reasonable is not an issue, sec. 301.9100-3(b)(2), Proced. &
Admin. Regs., places a limit on reasonable reliance on a
qualified tax professional. A taxpayer will not be considered to
(continued...)
- 22 -
Mr. Pearce has over 30 years of experience in tax and accounting,
has held numerous leadership positions within his field and had
extensive knowledge of petitioner’s trading activities and losses
from those activities.
Section 301.9100-3(b)(3) provides three exceptions to the
general rule stated in paragraph (b)(1) above. A taxpayer will
be deemed not to have acted reasonably and in good faith if the
taxpayer:
(i) Seeks to alter a return position for which an
accuracy-related penalty has been or could be imposed
under section 6662 at the time the taxpayer requests
relief (taking into account any qualified amended
return filed within the meaning of § 1.6664-2(c)(3) of
this chapter) and the new position requires or permits
a regulatory election for which relief is requested;
(ii) Was informed in all material respects of the
required election and related tax consequences, but
chose not to file the election; or
(iii) Uses hindsight in requesting relief. If specific
facts have changed since the due date for making the
election that make the election advantageous to a
taxpayer, the IRS will not ordinarily grant relief. In
such a case, the IRS will grant relief only when the
taxpayer provides strong proof that the taxpayer’s
decision to seek relief did not involve hindsight.
The first two exceptions of section 301.9100-3(b)(3), Proced. &
Admin. Regs., do not apply. The parties dispute whether
13
(...continued)
have reasonably relied on a qualified tax professional if the
taxpayer knew or should have known that the professional was not
(i) competent to render advice on the election, or (ii) aware of
all relevant facts.
- 23 -
subdivision (iii) applies; i.e., whether petitioner had the
benefit of hindsight in requesting relief.
Petitioner contends that, had he been aware of its
existence, he would have made the section 475(f) election on
time. Petitioner further contends that, because his total losses
on the day he actually filed the election were exactly the same
as they would have been if he had timely filed, he did not use
hindsight in requesting relief.
Respondent contends that allowing petitioner an extension of
time to make the election impermissibly gives petitioner the
benefit of hindsight. Respondent’s brief poses the following
hypothetical:
For the securities trader who has unrealized losses,
the decision to mark-to-market his securities is a good
one. Not only can he recognize his unrealized losses
at the end of the year, but those losses are also
ordinary losses which can be offset against ordinary
income. However, for the securities trader who has
unrealized gains at the end of the year, he may regret
the decision of electing the mark-to-market method of
accounting because his unrealized gains are also
accelerated and must be recognized at the end of the
year as ordinary income.[14]
We reject respondent’s hypothetical, as well as respondent’s
contention. Respondent’s contention is not consistent with the
plain reading of section 301.9100-3(b)(iii), Proced. & Admin.
14
An implicit contention in respondent’s hypothetical is
that a taxpayer with unrealized gains will not make the mark-to-
market election because it will result in ordinary income
treatment and will instead wait for the required time to pass to
get the benefit of capital gains.
- 24 -
Regs., which states in pertinent part: “If specific facts have
changed since the due date for making the election that make the
election advantageous to the taxpayer, the IRS will not
ordinarily grant relief.” (Emphasis added.) Accordingly, the
relevant inquiry is whether allowing a late election gives the
taxpayer some advantage that was not available on the due date.
In the instant case, the only fact that changed after the due
date for making the election was the discovery of the
availability of the election itself. Petitioner conducted no
trading activities and incurred no further losses between the
time he should have filed the section 475(f) election and the
date he actually filed the election. If a late election is
allowed, petitioner will not be entitled to anything more than
that to which he would have been entitled had he timely made the
election. The allowance of a late election is consistent with
the preamble to the regulations.
The instant case is distinguishable from Lehrer v.
Commissioner, T.C. Memo. 2005-167. In that case, the taxpayers
sought to make a section 475(f) election for taxable years 1999,
2000, and 2001 in taxable year 2004. The taxpayers reported
$44,000 of capital gains on their 1999 return, $313,715 of short-
term capital losses on their 2000 tax return, and $397,079 of
short-term capital losses on their 2001 return. In 2004, the
taxpayers sought to make a section 475(f) election to escape the
- 25 -
$3,000 capital loss limitation. The taxpayers in Lehrer are the
classic example of taxpayers who seek to use the benefit of
hindsight.15 The taxpayers sought retroactively to convert their
capital losses into ordinary losses several years later, with
continued trading in the interim, in order to escape a deficiency
and a section 6662 accuracy-related penalty. Lehrer stands in
marked contrast to the instant case, where petitioner filed his
election in the tax year it should have been filed, only a matter
of months after the due date under the revenue procedure, with no
trading in the interim, and no accuracy-related penalty was
determined. In sum, we hold that petitioner did not use
hindsight in requesting relief and that he acted reasonably and
in good faith.
Respondent contends that the interests of the Government are
deemed prejudiced pursuant to section 301.9100-3(c)(2), Proced. &
Admin. Regs., which provides in pertinent part as follows:
(2) Special rules for accounting method regulatory
elections.-- 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–
(i) Is subject to the procedure described in
§1.4461(e)(3)(i) of this chapter (requiring the
advance written consent of the Commissioner);
15
The taxpayers in Lehrer v. Commissioner, T.C. Memo. 2005-
167, did not raise the issue of sec. 9100 relief. We held that
the taxpayers failed to file within the time prescribed by Rev.
Proc. 99-17, supra.
- 26 -
(ii) Requires an adjustment under section 481(a)
(or would require an adjustment under section
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);
(iii) Would permit a change from an impermissible
method of accounting that is an issue under
consideration by examination, an appeals office,
or a federal court and the change would provide a
more favorable method or more favorable terms and
conditions than if the change were made as part of
an examination; or
(iv) Provides a more favorable method of
accounting or more favorable terms and conditions
if the election is made by a certain date or
taxable year.
Accordingly, the interests of the Government are not deemed to be
prejudiced in the case of an accounting method regulatory
election if the provisions of section 301.9100-3(c)(2)(i), (ii),
(iii), or (iv), Proced. & Admin. Regs., do not apply or, if they
do, unusual and compelling circumstances are present.
Section 301.9100-3(c)(1), Proced. & Admin. Regs., defines
prejudice as follows:
In general. --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. * * *
(i) Lower tax liability.-- 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 taxable years
- 27 -
affected by the election than the taxpayer would
have had if the election had been timely made
* * *.[16]
The interests of the Government are prejudiced if granting
petitioner an extension of time to file the section 475(f)
election would result in petitioner’s having a lower tax
liability than if petitioner had timely filed a section 475(f)
election. The parties have stipulated that between April 17,
2000, the date petitioner should have filed his section 475(f)
election, and July 21, 2000, the date petitioner actually filed
his section 475(f) election, petitioner did not conduct any
trading activities and incurred no further gains or losses.
Accordingly, pursuant to section 301.9100-3(c)(1)(i), Proced. &
Admin. Regs., there is no prejudice in the instant case because
granting petitioner an extension of time to file his section
475(f) election does not result in petitioner’s having a lower
tax liability than he would have had if he had timely filed the
election.
Respondent contends, however, that prejudice is presumed
because of the special rules for accounting method regulatory
16
The interests of the Government are also prejudiced if the
taxable year in which the regulatory election should have been
made, or any taxable years that would have been affected by the
election had it been timely made, are closed by the period of
limitations on assessment under sec. 6501 before the taxpayer is
granted 9100 relief. Sec. 301.9100-3(c)(1)(ii), Proced. & Admin.
Regs. That provision is not a prohibition in the instant case,
as the limitations periods for all taxable years affected by the
election remain open.
- 28 -
elections contained in section 301.9100-3(c)(2), Proced. & Admin
Regs. The parties dispute whether section 301.9100-3(c)(2)(ii),
Proced. & Admin. Regs., applies. Paragraph 3(c)(2)(ii) presumes
prejudice, absent unusual and compelling circumstances, if the
election “Requires an adjustment under section 481(a) (or would
require an adjustment under section 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)”.
Section 481(a) prescribes the rules for adjustments required
by changes in methods of accounting as follows:
SEC. 481(a) General Rule.-- In computing the
taxpayer’s taxable income for any taxable year
(referred to in this section as the “year of change”)–
(1) if such computation is under a method of
accounting different from the method under which
the taxpayer’s taxable income for the preceding
taxable year was computed, then
(2) there shall be taken into account those
adjustments which are determined to be necessary
solely by reason of the change in order to prevent
amounts from being duplicated or omitted, except
there shall not be taken into account any
adjustment in respect of any taxable year to which
this section does not apply unless the adjustment
is attributable to a change in the method of
accounting initiated by the taxpayer. [Emphasis
added.17]
17
Sec. 1.481-1(a)(1), Income Tax Regs., contains almost
identical language regarding the purpose of the adjustment under
sec. 481(a). Rev. Proc. 99-17, sec. 204, 1999-1 C.B. at 504
itself corroborates this purpose:
(continued...)
- 29 -
Accordingly, if a taxpayer changes his method of accounting and
an amount would be duplicated or omitted because of the change,
section 481(a) requires an adjustment to prevent the distortion.
For example, if an accrual method taxpayer included in income for
year 1 an amount which he had the right to receive, but switched
to the cash method of accounting in year 2 when he actually
received the amount, a section 481(a) adjustment would be
necessary to prevent the same item of income from being included
in 2 different tax years.
Petitioner contends that, because he adopted the mark-to-
market method of accounting for his securities trading business
in taxable year 2000, the first year that his securities trading
business existed, and did not change from another method of
accounting, no item would be duplicated or omitted, no section
481(a) adjustment is required, and therefore there is no
prejudice under section 301.9100-3(c)(2)(ii), Proced. & Admin.
Regs.18
17
(...continued)
In computing taxable income, § 481(a) requires a
taxpayer to take into account those adjustments
necessary to prevent amounts from being duplicated or
omitted when the taxpayer’s taxable income is computed
under a method of accounting different from the method
used to compute taxable income for the preceding
taxable year.
18
Cf. sec. 301.9100-3(f), Example (4), Proced. & Admin.
Regs., which provides as follows:
(continued...)
- 30 -
Respondent contends that petitioner ignores the following
parenthetical language in paragraph 3(c)(2)(ii): “(or would
require an adjustment under section 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)”. Respondent contends that the
parenthetical language presumes prejudice to the Government
because petitioner, hypothetically, could have adopted the mark-
to-market method of accounting in a year subsequent to the year
he should have adopted the mark-to-market method and a section
481(a) adjustment might possibly be necessary.
Assuming arguendo that the parenthetical phrase in paragraph
3(c)(2)(ii) did apply, the interests of the Government are not
deemed to be prejudiced if unusual and compelling circumstances
18
(...continued)
Election not requiring adjustment under section 481(a).
Taxpayer D prepares D’s 1997 income tax return. D is
unaware that a particular accounting method regulatory
election is available. D files D’s 1997 return without
making the election and uses another permissible method
of accounting. The applicable regulation provides that
the election is made on a cut-off basis (without an
adjustment under sec. 481(a)). In 1998, D requests
relief under this section to make the election under
the regulation. If D were granted an extension of time
to make the election, D would pay no less tax than if
the election had been timely made. Assume that
paragraphs (c)(2)(i), (iii), and (iv) of this sec. do
not apply. Under paragraph (c)(2)(ii) of this section,
the interests of the Government are not deemed to be
prejudiced because the election does not require an
adjustment under section 481(a).
- 31 -
are present. Section 301.9100-3(c)(2), Proced. & Admin. Regs.,
plainly states: “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 [is one to which subdivision (i), (ii), (iii), or (iv)
applies].” (Emphasis added.) In other words, assuming
subdivision (ii) applies, unusual and compelling circumstances
defeat the presumption of prejudice. Respondent contends that
the circumstances surrounding petitioner’s failure to timely file
a section 475(f) election were not unusual and compelling and did
not actually cause petitioner to fail to timely file the
election.
Respondent points out that the collapse of the technology
stocks, the liquidation of petitioner’s trading accounts, and
petitioner’s $25 million in losses during the first quarter of
taxable year 2000 did not literally prevent petitioner from
making the section 475(f) election. Respondent further points
out that petitioner failed to timely file the section 475(f)
election because his accountant was unaware of the election and
that ignorance of the law is no excuse.
We disagree with respondent’s contention that unusual and
compelling circumstances are not present in the instant case.
The Commissioner has not defined, by regulation or otherwise,
unusual or compelling circumstances. We note that the preamble
- 32 -
to the regulations states: “What are unusual and compelling
circumstances must be decided on a case-by-case basis in light of
all applicable facts and circumstances.” T.D. 8742, 1998-1 C.B.
at 390. We briefly recount the facts of the instant case.
Petitioner suffered a $25 million loss when his trading accounts
were liquidated on April 14, 2000, 3 days before the date
prescribed in Rev. Proc. 99-17, supra, for timely filing a
section 475(f) election. Mr. Pearce, petitioner’s tax adviser
who had full knowledge of petitioner’s trading activities and
losses and over 30 years of experience as an accountant, was
unaware of the section 475(f) election for securities traders.
Mr. Sellers, another accountant, was also unaware of the
availability of the section 475(f) election. As soon as
petitioner learned of the existence of the section 475(f)
election, he promptly employed Caplin & Drysdale to make the
section 475(f) election and file a request for section 9100
relief. Petitioner conducted no further trading activities
between the date he should have filed the election and the date
he actually filed the election. We find the combination of
circumstances in the instant case both unusual and compelling and
conclude that the interests of the Government should not be
presumed to be prejudiced even if the parenthetical phrase of
section 301.9100-3(c)(2)(ii), Proced. & Admin. Regs., did apply.
- 33 -
In conclusion, under section 301.9100-3(c)(1)(i), Proced. &
Admin. Regs., there is no prejudice to the Government in the
instant case. Petitioner did not realize any gains or suffer any
further losses between the time he should have filed his section
475(f) election and the date he actually filed the election.
Petitioner will be entitled to no more than he would have been
entitled to had he filed his section 475(f) election by the date
prescribed in Rev. Proc. 99-17, supra, which is precisely the
purpose of section 9100 relief: to “permit []taxpayers that are
in reasonable compliance with the tax laws to minimize their tax
liability by collecting from them only the amount of tax they
would have paid if they had been fully informed and well
advised.” T.D. 8742, 1998-1 C.B. at 389.19 We conclude that
petitioner is entitled to an extension of time to file his
section 475(f) election pursuant to section 301.9100-3, Proced. &
Admin. Regs. Petitioner is entitled to relief because he acted
reasonably and in good faith and the interests of the Government
will not be prejudiced. Accordingly, we hold that petitioner is
19
See supra note 11, and accompanying text.
- 34 -
entitled to the benefits of a section 475(f) election for the
taxable year 2000 as if he had timely filed the election.
To reflect the foregoing,
Decision will be entered
under Rule 155.