TC clarifies filing requirements for mark-to-market election.

• Author: Schmelzle, George

In L.S. Vines, 126 TC 279 (2006), the Tax Court ruled that a taxpayer who lost over $25 million from trading securities could be allowed an extension to take a Sec. 475(f) election. This election allows a taxpayer to use the mark-to-market (MTM) method, which permits him or her to deduct all trading losses as ordinary in one tax year (instead of as capital losses, limited to $3,000 per tax year).The court found that Vines met the requirement for an extension under Regs. Sec. 301.9100-3, because he acted reasonably and in good faith and the government's interests would not be prejudiced.

The case is significant for two reasons. First, the court held that the government's interests are not always prejudiced when taxpayers file a late election that allows them to limit their tax liability to the amount they would have paid had they been knowledgeable about the tax law. Second, Regs. Sec. 301.9100 provides relief to certain taxpayers needing extensions to file elections. However, the Service has denied most letter ruling requests for MTM-method filing extensions; it believes such extensions permit taxpayers to use hindsight to lower their tax liability, and that relief should be granted only in unusual or compelling circumstances. The Vines court found that filing a late Sec. 475(f) election does not always involve hindsight, and that the IRS has not defined "unusual or compelling circumstances."

Background

The taxpayer was an attorney who won a large class-action lawsuit in 1999. As a result, he reported profits of $18,520,775 in 1999 and $16,966,055 in 2000. Vines subsequently retired from his law firm and started trading securities on Jan. 28, 2000. After technology stocks declined sharply, he incurred losses of $25,196,152 by April 14, 2000, when he stopped actively trading. Because Vines was in the business of trading securities, he was eligible for a Sec. 475(f) election, which would have allowed him to deduct all of his trading losses as ordinary, offsetting the ordinary income provided by his law practice. However, when he filed for an extension to file his 1999 return, his tax preparer did not advise him to file a Sec. 475(f) election.

After discovering that he could elect to use the MTM method, on July 21, 2000, Vines attempted to change his accounting method by filing Form 3115, Application for Change in Accounting Method, a Sec. 475(f) election and a letter explaining why he should be entitled to an extension under Regs. Sec. 301.9100-3(c). He was advised by his accountant and lawyers that he could resume active trading while they requested an IRS ruling; thus, on July 26, 2000, he resumed his trading activities. On Oct. 27, 2000, he submitted a ruling...