L.S. VINES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 12763-04.
UNITED STATES TAX COURT
Filed May 11, 2006.
126 T.C. No. 15
WELLS, Judge
Held: P is entitled to an extension of time to file his
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
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.
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
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
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
Mr. Sellers informed petitioner that, according to Rev. Proc. 99-17, 1999-1 C.B. 503, in order for a
Mr. Sellers recommended that petitioner hire other tax counsel to make the
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.* * * * * * *
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
Between the date that petitioner should have filed his
When petitioner filed his
On January 17, 2001, petitioner filed his Form 1040 for his 2000 taxable year, reporting all items based on the assumption that his
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.
* * * * * * *
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
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
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
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 undersection 301.9100-3(b) , without using hindsight in requesting relief.* * *
The issue we decide is whether, pursuant to
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,
If a qualified taxpayer makes a
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
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
Petitioner contends that he should be allowed the benefit of
The interpretation of
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]
§ 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
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
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 undersection 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.
(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
Regarding
Regarding
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.
- (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
Petitioner contends that, had he been aware of its existence, he would have made the
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
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
The instant case is distinguishable from Lehrer v. Commissioner, T.C. Memo. 2005-167. In that case, the taxpayers sought to make a
Respondent contends that the interests of the Government are deemed prejudiced pursuant to
(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
§ 1.446-1(e)(3)(i) of this chapter (requiring the advance written consent of the Commissioner);(ii) Requires an adjustment under section 481(a) (or would require an adjustment undersection 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
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
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
Respondent contends, however, that prejudice is presumed because of the special rules for accounting method regulatory
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]
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
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
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
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
To reflect the foregoing,
Decision will be entered under Rule 155.