T.C. Memo. 2008-297
UNITED STATES TAX COURT
MARK N. KANTOR AND MARLA R. KANTOR, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 9704-06. Filed December 29, 2008.
Mark N. Kantor, pro se.
Cheryl A. McInroy, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined deficiencies of
$376,772 and $1,489 in petitioners’respective Federal income
taxes for 2000 and 2001 and a $29,887 addition to tax under
section 6651(a)(1) for 2000.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
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all Rule references are to the Tax Court Rules of Practice and
Procedure. Petitioner Marla Kantor is a petitioner because she
filed with her husband a joint Federal income tax return for 2000
and 2001.
The issue for decision is whether Mark Kantor (petitioner)
is entitled under section 475(f) to use the mark-to-market method
of accounting in connection with his business as a trader in
securities.1
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed petitioners resided in
the State of New York.
Petitioners are married and have two children. Petitioner
holds a bachelor’s degree in economics from Brooklyn College, a
law degree from St. John’s Law School, and a master of laws
degree from Harvard Law School. Since finishing his education,
petitioner has worked primarily as a securities trader on Wall
Street.
Over the years petitioner has repeatedly used drugs and has
been admitted to a number of drug rehabilitation programs.
1
Petitioner is the same taxpayer involved in Kantor v.
Commissioner, T.C. Memo. 1997-112, wherein we held petitioner
liable for additions to tax under sec. 6653(a) in connection with
petitioner’s failure to file timely Federal income tax returns
for 1981 through 1985.
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In December 1999 petitioner retired as a Wall Street
securities trader, and in January 2000 petitioner received from
his Wall Street firm a retirement bonus of $2.5 million.
From January until August 2000 petitioner enjoyed his
retirement by playing golf and vacationing with family.
Beginning August 2000 through January 2001 petitioner, as a
sole proprietor, carried on a securities trading business.
Petitioner received from his broker monthly brokerage statements,
which reported petitioner’s securities trading activities using
the mark-to-market method of accounting. Petitioner used the
monthly brokerage statements to track his trading activities.
Petitioner realized significant losses in his business as a
securities trader.
In February 2001 petitioner closed his securities trading
business.
In April and August 2001 petitioners filed with respondent
requests for extensions of time to file their 2000 Federal income
tax return, and petitioners included with their requests
estimated income tax payments relating to the $2.5 million
retirement bonus petitioner received in 2000.
From September 2001 through February 2002 petitioner was
admitted to a drug rehabilitation program in Florida.
On November 7, 2003, and on February 2, 2004, respectively,
petitioners filed their 2000 and 2001 joint Federal income tax
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returns late. Petitioners attached to each return a Schedule C,
Profit or Loss From Business (Sole Proprietorship), showing
petitioner’s business as a securities trader. Petitioner’s
Schedules C, prepared using the mark-to-market method of
accounting, reported ordinary losses of $1,064,248 and $246,354
for 2000 and 2001, respectively.
On December 19, 2003, petitioners amended their 2000 joint
Federal income tax return to reflect an additional $744,000 in
ordinary losses from petitioner’s business as a securities
trader.
After an audit, on February 24, 2006, respondent mailed to
petitioners a notice of deficiency in which respondent determined
that petitioner had not properly elected, under section 475(f),
the mark-to-market method of accounting for his securities
trading business for 2000 and 2001, and respondent treated
petitioner’s securities trading losses as capital losses.2
Respondent’s determinations gave rise to the $376,772 and $1,489
deficiencies in petitioners’ respective 2000 and 2001 Federal
income taxes.
During a November 7, 2006, conference with respondent’s
counsel, petitioner, for the first time, claimed that in 2000 he
and his wife had formed a partnership in connection with his
2
It is not clear from the record how respondent treated
petitioner’s additional $744,000 claimed losses for 2000.
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securities trading business and that the partnership had elected
under section 475(f) to use the mark-to-market method of
accounting. As proof thereof petitioner submitted a Form 1065,
U.S. Return of Partnership Income, for 2000, indicating that the
alleged partnership had made a mark-to-market election. The Form
1065 was signed by petitioner’s accountant but was dated November
6, 2006. Also, the Form 1065 was not signed by either petitioner
or his wife and was never filed with respondent. At the
conference petitioner claimed that as partners he and his wife
made an “internal” election in 2000 to use the mark-to-market
method of accounting.
In connection with his business as a securities trader,
petitioner never filed with respondent for 2000 or 2001 a Form
3115, Application for Change in Accounting Method, or a statement
describing an election to use the mark-to-market accounting
method. Petitioner also has not requested relief under section
301.9100-3, Proced. & Admin. Regs. (section 9100 relief), from
the timely election requirements of section 475(f).
OPINION
Section 475(f) provides generally that a taxpayer engaged in
business as a securities trader may elect to use the mark-to-
market method of accounting for securities held in a business.
Under the mark-to-market method of accounting a trader generally
recognizes at the end of the year ordinary gain or loss on all
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securities held in the business as if the securities were sold at
the end of the year for fair market value. Sec. 475(d)(3),
(f)(1)(A)(i); Knish v. Commissioner, T.C. Memo. 2006-268; Lehrer
v. Commissioner, T.C. Memo. 2005-167, affd. 279 Fed. Appx. 549
(9th Cir. 2008); Chen v. Commissioner, T.C. Memo. 2004-132.
A securities trader electing under section 475(f) to use the
mark-to-market method of accounting for securities held in the
business is generally required to file with respondent a
statement making the mark-to-market election, identifying the
first taxable year for which the election is effective and
describing the business to which the election relates. See Knish
v. Commissioner, supra; Lehrer v. Commissioner, supra; Rev. Proc.
99-17, sec. 5.03(1), 1999-1 C.B. 503, 504. The statement must be
filed no later than the due date of the trader’s original Federal
income tax return (without regard to extension) for the taxable
year immediately preceding the election year, and if the election
entails a change in accounting method, the trader must also
attach a Form 3115 to the trader’s timely filed original Federal
income tax return for the election year. Rev. Proc. 99-17, secs.
5.03(1), 5.04, 1999-1 C.B. at 504, 505.
For a trader’s first year of business, Rev. Proc. 99-17,
sec. 5.03(2), 1999-1 C.B. at 505, provides that the trader may
make the section 475(f) mark-to-market election by placing in the
books and records of the business, no later than 2 months and 15
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days after the first day of the year, a written statement making
the mark-to-market election, identifying the first taxable year
for which the election is effective and describing the business
to which the election relates. The trader must attach a copy of
the statement to the trader’s Federal income tax return for the
election year. Id.
Where an individual securities trader has made a proper
mark-to-market election under section 475(f), losses resulting
from the trader’s business will be treated as ordinary losses and
will be deductible under section 165(c). However, where the
trader has not made a proper election, such losses will be
treated as capital losses and will be deductible only to the
extent of capital gains plus $3,000. Secs. 165(a), (c), (f),
1211(b)(1); Knish v. Commissioner, supra.
Petitioner admits that he has not filed with respondent a
Form 3115. Petitioner argues that the monthly brokerage
statements relating to his business (reflecting the mark-to-
market method of accounting) qualify as a statement making the
mark-to-market election, that he therefore made an election under
section 475(f), and that he should be entitled to treat his
securities trading losses as ordinary losses. In the
alternative, petitioner claims that the Form 1065 he submitted at
the November 7, 2006, conference with respondent’s counsel
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combined with the alleged internal election he and his wife made
in 2000 should be treated as a valid section 475(f) election.
We disagree. Petitioner’s monthly brokerage statements do
not contain a written statement that makes the mark-to-market
election. Further, petitioner’s Form 1065 was never filed with
respondent, was not signed by petitioner and his wife, and was
not submitted to respondent’s counsel until over 5 years after it
was due.
Additionally, petitioner did not attach to petitioners’ tax
returns for 2000, 2001, or for any other year, a statement making
the mark-to-market election, identifying the first taxable year
for which the election was to be effective, and describing the
business to which the election was to relate.
Courts have consistently held that a securities trader did
not make an election under section 475 where the trader did not
follow the election requirements of Rev. Proc. 99-17, supra. See
Knish v. Commissioner, supra (election not made where statement
was not attached to prior year tax return and Form 3115 was filed
late); Marandola v. United States, 76 Fed. Cl. 237 (2007)
(election not made where statement filed with amended tax
returns); Acar v. United States, 98 AFTR 2d 2006-6296, 2006-2
USTC par. 50,529 (N.D. Cal. 2006) (election not made where
statement was filed with amended return 3 years after due date of
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original return and no Form 3115 was filed), affd. 545 F.3d 727
(9th Cir. 2008).
Petitioner has not satisfied the election requirements of
Rev. Proc. 99-17, supra, and petitioner has not properly elected
under section 475(f) to use the mark-to-market method of
accounting for 2000 and 2001.
Under section 301.9100-3, Proced. & Admin. Regs., respondent
may grant administrative relief to a securities trader with
regard to improper mark-to-market elections if the trader, among
other things, requests section 9100 relief and demonstrates that
he acted reasonably and in good faith in failing to make a timely
election under section 475(f). See Vines v. Commissioner, 126
T.C. 279, 290-291 (2006). A trader has not acted reasonably and
in good faith if the trader uses hindsight in requesting relief
by attempting to make a section 475(f) mark-to-market election
years after the election was due in order to convert capital
losses into ordinary losses. See Vines v. Commissioner, supra at
293; Lehrer v. Commissioner, supra; Acar v. Commissioner, supra;
sec. 301.9100-3(b)(3)(iii), Proced. & Admin. Regs.
Petitioner, however, has not requested section 9100 relief.
See Knish v. Commissioner, T.C. Memo. 2006-268 (relief denied
where request not made in petition); Marandola v. United States,
supra (relief denied where taxpayer neither requested relief
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through a private letter ruling nor asked for relief in a refund
claim).
Even if petitioner had requested section 9100 relief, we
conclude that petitioner, a Wall Street trader with a master of
laws degree, used hindsight in claiming that he made the section
475(f) election on the monthly brokerage statements and on the
Form 1065. Petitioner does not qualify for section 9100 relief.
Section 6651(a)(1) imposes an addition to tax for a
taxpayer’s failure to timely file a tax return unless the
taxpayer proves that such failure is due to reasonable cause and
not willful neglect. See United States v. Boyle, 469 U.S. 241,
245 (1985). By virtue of our finding that petitioners’ return
for 2000 was filed late, respondent has carried his burden of
production under section 7491(c) as to the addition to tax.
Petitioners argue that they were unable to file their 2000
tax return because petitioner was undergoing drug rehabilitation
from September 2001 through February 2002. While we sympathize
with petitioner’s drug problems, petitioners did not actually
file their 2000 joint tax return until November 7, 2003, nearly
21 months after petitioner’s February 2002 release from the drug
program. Petitioners have not offered an adequate explanation
for the delay in filing their 2000 tax return. We conclude that
petitioners’ failure to file timely their 2000 joint Federal
income tax return was due to willful neglect rather than to
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reasonable cause, and we sustain respondent’s imposition of the
section 6651(a)(1) addition to tax for 2000.
To reflect the foregoing,
Decision will be entered
under Rule 155.