Tax Lawyer's Blog

Mark N. Kantor and Marla R. Kantor v Commissioner of Internal Revenue – The issue for decision in this case was whether the taxpayer was entitled under section 475(f) to use the mark-to-market method of accounting in connection with his business as a securities trader.

The taxpayer filed his 2000 and 2001 tax returns and claimed stock losses as ordinary losses on Schedule C using the mark-to-market method of accounting.

The returns were audited and the IRS issued a Notice of Deficiency stating that petitioner had not properly elected, under section 475(f), the mark-to-market method of accounting and reclassifying the taxpayer’s losses as capital losses.

Mark-to-Market Method

IRC § 475(f) allows securities traders to make an election to treat securities held at the end of the year as if they were sold on December 31 of that year for their fair market value. 

Under the mark-to-market method, all gains and losses recognized are ordinary rather than capital gains and losses.

Timely Election Required 

Judge Swift noted that Rev. Proc. 99-17 controls the manner in which a 475(f) election is to be made:

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.

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.

No Substitute for Compliance with Rev. Proc. 99-17

The taxpayer argued that his brokerage statements, which showed gains and losses at year end as if the stocks were sold on December 31, constitued a timely election under 475(f).

Judge Swift disagreed and found for the Commissioner:

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,

9100 Relief

The Court also considered whether or not the taxpayer might have qualified for relief under section 301.9100-3, Proced. & Admin. Regs (9100 Relief) had he requested it:

[R]espondent 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).

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.

Judge Swift ruled that the taxpayer would not have qualified for 9100 relief because he did, in fact, use hindsight in requesting such relief by attempting to make the 475(f) election several years after the election was required to be made.

Author’s Advice: If you are a securities trader or about to become one, get the advice of a qualified tax advisor (i.e. experienced in representing securities traders) before filing your tax return.

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