t c no united_states tax_court l s vines petitioner v commissioner of internal revenue respondent docket no filed date p a lawyer for over years settled a class action law suit during and received compensation_for his legal services p received approximately half of the compensation in taxable_year and half in taxable_year 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 date 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 tax_return on date p did not elect the mark-to- market method_of_accounting pursuant to sec_475 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 date p learned of the mark-to-market_election for securities traders from a friend obtained the citation of sec_475 i r c and learned that revproc_99_17 1999_1_cb_503 required the election to be filed no later than the due_date for the previous year’s tax_return ie date p then employed a law firm to file the election and a request for relief pursuant to sec_301 c proced admin regs on date 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 and date p’s losses were exactly the same on date as they were on date in a private_letter_ruling dated date r denied p’s request for an extension of time to file the election pursuant to sec_301_9100-3 proced admin regs subsequently r determined deficiencies in tax for p’s taxable years and held p is entitled to an extension of time to file his sec_475 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 i r c for the taxable_year 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 and taxable years of dollar_figure and dollar_figure respectively the issue we decide is whether pursuant to sec_301_9100-3 proced admin regs petitioner should be granted an extension of time to file a 1respondent contends that petitioner in not entitled to certain deductions for meals and entertainment for taxable_year gifts to employees for taxable_year and alimony payments for taxable_year all of which petitioner concedes sec_475 election for his taxable_year 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 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 years during date petitioner began representing certain plaintiffs in a national class action lawsuit that settled with the defendants during petitioner received approximately one-half of his compensation_for settling the class action suit during the taxable_year and the other half during the taxable_year petitioner reported net profits of dollar_figure and dollar_figure from his law practice on line of schedule c profit or loss from business of his form sec_1040 u s individual_income_tax_return for taxable years and respectively 2the 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 during date 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 dollar_figure million in each of those accounts petitioner later established a brokerage account with terra nova during date during the fall of 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 date and date 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 date 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 date petitioner used margin borrowing as part of his securities trading strategy on date 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 early april as of date petitioner’s net trading losses totaled dollar_figure after his account was liquidated on date 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 years of experience had served as petitioner’s business and personal accountant for over 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 date 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 on date petitioner timely filed form_4868 requesting an extension until date to file his return for taxable_year a sec_475 election was not enclosed with the form_4868 because mr pearce did not know about the applicability of sec_475 or any related internal_revenue_service irs revenue_procedure to securities traders mr pearce did not advise petitioner of the availability of a sec_475 election on or about date 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 taxable_year and that consequently his dljdirect account had been liquidated on date 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 date petitioner attempted to contact another accountant charles e sellers mr sellers regarding the possibility of deducting his losses as a securities trader on date 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 sec_475 and the mark-to-market_election available to 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 sec_475 dr sullivan relayed the citation to petitioner who in turn relayed it to mr sellers mr sellers informed petitioner that according to revproc_99_17 1999_1_cb_503 in order for a sec_475 election to be effective for the taxable_year petitioner had to file the election by date the due_date for his tax_return mr sellers then informed petitioner that he should qualify for an extension of time within which to make the sec_475 election under sec_301_9100-3 proced admin regs section relief mr sellers recommended that petitioner hire other tax counsel to make the sec_475 election and to request section relief petitioner hired the washington d c law firm of caplin drysdale to prepare and file the sec_475 election and request for section relief on date caplin drysdale on behalf of petitioner submitted to respondent a taxpayer election of mark to market accounting under sec_475 sec_475 election along with a 3sec relief is discussed in detail infra six-page letter outlining the reasons petitioner should qualify for section relief to make the sec_475 election for the taxable_year the letter also stated that petitioner would file a formal private_letter_ruling request also enclosed with the sec_475 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 sec_475 the taxpayer is not requesting any change in the accounting methods used in his trade_or_business as an attorney and since the year 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 sec_481 adjustment because he was not engaged in the trade_or_business of being a trader in securities prior to the year he is adopting a mark to market method_of_accounting for his trade_or_business as a securities trader which did not begin until based on the limited number of securities transactions in as set forth above and since petitioner was still engaged in the full time practice of law for all of it seems clear that he did not qualify as a trader in securities in and therefore has not adopted a method_of_accounting for his trade_or_business as a securities trader in any year prior to for this reason there is no adjustment under sec_481 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 sec_475 election and the protective form_3115 and requesting section relief on date on that basis caplin drysdale advised petitioner that he could resume his securities trading activities without adversely affecting his request for section relief mr sellers gave petitioner the same advice based on caplin drysdale’s and mr sellers’ advice petitioner resumed his trading activities on date between the date that petitioner should have filed his sec_475 election date and the date petitioner actually filed his sec_475 election date petitioner did not purchase any publicly-traded stock did not sell any publicly traded stock and had no gain_or_loss from the disposition of any publicly traded stock thus petitioner’s losses on date were exactly the same as they were on date on date caplin drysdale submitted to respondent on behalf of petitioner a formal private_letter_ruling request seeking section relief for his sec_475 election section relief request respondent required petitioner to pay a dollar_figure fee to file the section relief request when petitioner filed his section relief request on date the taxable_year had not yet closed and petitioner’s tax_return for the taxable_year was not yet due respondent had not imposed any accuracy-related_penalty under sec_6662 with respect to either the or taxable_year on date petitioner filed his form_1040 for his taxable_year reporting all items based on the assumption that his section relief request would be granted petitioner reported a net_loss of dollar_figure from his securities trading business on schedule c of his form_1040 attached form_8275 disclosure statement regarding his sec_475 election and also attached a copy of the sec_475 election filed on date 4respondent’s technical case history indicates that respondent told petitioner’s representative during a telephone conference on date that the form_3115 and statement are not binding on us and that he should tell the taxpayer to file a protective_election for the technical case history also indicates that during a separate telephone conference on continued following an adverse private_letter_ruling request conference on date respondent’s office_of_chief_counsel financial institutions products issued a conference_report dated date 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 relief to obtain additional time to file the election continued date respondent told petitioner’s representative if petitioner is not granted section relief he has to make the election and follow the procedures for making the election for year - so petitioner should think about a protective_election at the time respondent advised petitioner’s representative to file a protective_election for taxable_year petitioner had already filed his tax_return for his taxable_year on date on date petitioner filed a document captioned taxpayer protective_election for mark to market accounting under sec_475 for taxable_year on date 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 date or the protective sec_475 election he filed on date the parties also dispute whether petitioner properly made a valid sec_475 election for hi sec_2001 taxable_year we do not reach that issue because for reasons stated below we hold that petitioner is entitled to a sec_475 election for his taxable_year we would have done a regulation project if we had not believed sec_301_9100-3 would prevent taxpayers from filing late elections the drafters of revproc_99_17 did not want relief to be available for f elections on date respondent’s office_of_chief_counsel issued a sec_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 sec_301_9100-3 yes is the taxpayer considered to have acted reasonably and in good_faith taking into account sec_301 b i - iii it is unnecessary to reach conclusions pertaining to sec_301_9100-3 i - iii due to the taxpayer’s failure to satisfy the requirements under sec_301_9100-3 sec_301_9100-3 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 sec_301_9100-3 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 sec_301_9100-3 proced admin regs provides special rules for accounting_method regulatory elections which continued on date petitioner filed a form_1045 application_for tentative refund for his taxable_year claiming a dollar_figure decrease in income_tax for taxable_year on account of a claimed net_operating_loss_carryback of dollar_figure from his taxable_year on date petitioner also filed a form 1040x amended u s individual_income_tax_return for his taxable_year to reflect the claimed net_operating_loss_carryback of dollar_figure from his taxable_year as well as a net_operating_loss_carryover of dollar_figure from his taxable_year the amended_return reflected a total_tax of dollar_figure on date respondent denied petitioner’s section relief request in priv ltr rul stating in pertinent part as follows because taxpayer’s request for relief is denied pursuant to sec_301_9100-3 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 sec_301 b without using hindsight in requesting relief continued presume prejudice to the interests of the government absent unusual and compelling circumstances the application of sec_301_9100-3 proced admin regs is a central issue in the instant case and is discussed in greater detail below 8respondent later denied petitioner’s refund request opinion the issue we decide is whether pursuant to sec_301_9100-3 proced admin regs petitioner should be granted an extension of time to file a sec_475 election for his taxable_year sec_475 provides as follows sec_475 election of mark to market for traders in securities or commodities -- 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 sec_475 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_day of the taxable_year any gain_or_loss must be taken into account in that year sec_475 if a qualified_taxpayer makes a sec_475 election the gain_or_loss on the sale or disposition of a security is treated as ordinary_income or loss sec_475 f 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 sec_475 election gain_or_loss from the sale or disposition of a security is treated as capital_gain or loss see sec_1221 and sec_1222 capital losses for individuals are subject_to the capital_loss limitations under sec_1211 which provides that capital losses are allowed only to the extent of capital_gains plus dollar_figure petitioner has dollar_figure in ordinary_income from his law practice and dollar_figure 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 date accordingly the parties do not dispute whether petitioner is qualified to make a sec_475 election their primary dispute is whether petitioner should be allowed the benefit of section relief to extend the time to make the sec_475 election respondent relies on revproc_99_17 sec_5 1999_1_cb_503 which states in pertinent part as follows sec_5 procedures for making the mark-to-market elections dollar_figure elections effective for a taxable_year beginning on or after date general procedure for a taxpayer to make a sec_475 or f election that is effective for a taxable_year beginning on or after date the taxpayer must file a statement that satisfies the requirements in section dollar_figure 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 revproc_99_ sec_503 petitioner was required to file his sec_475 election by date the due_date for his tax_return petitioner contends that he should be allowed the benefit of section relief to extend the time to make the sec_475 election because he acted reasonably and in good_faith and the interests of the government will not be prejudiced 9petitioner also contends that revproc_99_17 1999_1_cb_503 is invalid and unlawful because the plain language of sec continued respondent contends that petitioner should not be allowed section relief to extend the time to make the sec_475 election because an election of the mark-to-market method_of_accounting under sec_475 is an accounting_method regulatory electiondollar_figure according to respondent section relief is not available because sec_301_9100-3 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 sec_475 election it impermissibly will give petitioner the benefit of hindsight the interpretation of sec_301_9100-3 proced admin regs and the parties’ arguments regarding section relief create issues of first impression in this court we begin continued g compels the commissioner to issue regulations outlining the procedures for making the sec_475 election which the commissioner did not do and cites 89_tc_357 affd 883_f2d_1350 7th cir in support of his position because we hold for reasons stated below that petitioner is entitled to sec relief we do not need to decide questions relating to the validity of the limitations set forth in revproc_99_17 supra 10see sec_301_9100-1 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 our analysis of sec_301_9100-3 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 sec_301 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 1998_1_cb_388 sec_301_9100-3 proced admin regs provides in pertinent part as follows sec_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 11the secretary also expressed this view in the preamble to temporary proposed sec_301 regulations t d 1996_2_cb_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 regulations t d 1996_2_cb_194 where she stated i would agree that the 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 tnt date 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 the taxpayer acted reasonably and in good_faith and the interests of the government will not be prejudiced by granting relief in denying petitioner’s request for section relief respondent in priv ltr rul stated the following because taxpayer’s request for relief is denied pursuant to sec_301_9100-3 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 sec_301 b without using hindsight in requesting relief respondent’s contentions in the instant case are consistent with respondent’s conclusions in priv ltr rul 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 12respondent’s chief_counsel file memo also states it is unnecessary to reach conclusions pertaining to sec_301_9100-3 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 sec_301_9100-3 proced admin regs defines reasonableness and good_faith as follows b reasonable action and good_faith -- in general -- except as provided in paragraphs b 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 sec_301_9100-3 proced admin regs are disjunctive ie 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 sec_301_9100-3 proced admin regs there is no question that petitioner requested relief before respondent discovered the failure to make the sec_475 election regarding sec_301_9100-3 proced admin regs pertaining to the exercise of reasonable diligence we note that while petitioner had practiced law for over years he had only been in business as a securities trader for approximately months at the time respondent contends he should have made his sec_475 election ie date within a day of learning of the sec_475 election from dr sullivan petitioner contacted a new accountant mr sellers mr sellers was also unaware of sec_475 but petitioner retrieved the citation of sec_475 from dr sullivan and provided it to mr sellers petitioner also immediately hired caplin drysdale to file the sec_475 election and request section relief regarding sec_301_9100-3 proced admin regs which finds good_faith where the taxpayer acts in reasonable reliance upon counsel petitioner was a personal injury lawyer for over 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 professionaldollar_figure 13we note that although whether petitioner’s reliance was reasonable is not an issue sec_301_9100-3 proced admin regs places a limit on reasonable reliance on a qualified_tax professional a taxpayer will not be considered to continued mr pearce has over 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 sec_301_9100-3 provides three exceptions to the general_rule stated in paragraph b 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 sec_6662 at the time the taxpayer requests relief taking into account any qualified_amended_return filed within the meaning of sec_1_6664-2 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 sec_301_9100-3 proced admin regs do not apply the parties dispute whether 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 subdivision iii applies ie 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 sec_475 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 we reject respondent’s hypothetical as well as respondent’s contention respondent’s contention is not consistent with the plain reading of sec_301_9100-3 proced admin 14an 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 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 sec_475 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 tcmemo_2005_167 in that case the taxpayers sought to make a sec_475 election for taxable years and in taxable_year the taxpayers reported dollar_figure of capital_gains on their return dollar_figure of short- term capital losses on their tax_return and dollar_figure of short-term_capital_losses on their return in the taxpayers sought to make a sec_475 election to escape the dollar_figure capital_loss limitation the taxpayers in lehrer are the classic example of taxpayers who seek to use the benefit of hindsightdollar_figure 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 sec_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 sec_301_9100-3 proced admin regs which provides in pertinent part as follows 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 sec_1 e i of this chapter requiring the advance written consent of the commissioner 15the taxpayers in lehrer v commissioner tcmemo_2005_167 did not raise the issue of sec relief we held that the taxpayers failed to file within the time prescribed by revproc_99_17 supra ii requires an adjustment under sec_481 or would require an adjustment under sec_481 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 sec_301_9100-3 ii iii or iv proced admin regs do not apply or if they do unusual and compelling circumstances are present sec_301_9100-3 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 affected by the election than the taxpayer would have had if the election had been timely made the interests of the government are prejudiced if granting petitioner an extension of time to file the sec_475 election would result in petitioner’s having a lower tax_liability than if petitioner had timely filed a sec_475 election the parties have stipulated that between date the date petitioner should have filed his sec_475 election and date the date petitioner actually filed his sec_475 election petitioner did not conduct any trading activities and incurred no further gains or losses accordingly pursuant to sec_301_9100-3 proced admin regs there is no prejudice in the instant case because granting petitioner an extension of time to file his sec_475 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 16the 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 relief sec_301_9100-3 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 elections contained in sec_301_9100-3 proced admin regs the parties dispute whether sec_301_9100-3 proced admin regs applies paragraph c ii presumes prejudice absent unusual and compelling circumstances if the election requires an adjustment under sec_481 or would require an adjustment under sec_481 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 sec_481 prescribes the rules for adjustments required by changes in methods_of_accounting as follows sec_481 general_rule -- in computing the taxpayer’s taxable_income for any taxable_year referred to in this section as the year_of_change - 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 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 sec_1_481-1 income_tax regs contains almost identical language regarding the purpose of the adjustment under sec_481 revproc_99_17 sec c b pincite itself corroborates this purpose continued accordingly if a taxpayer changes his method_of_accounting and an amount would be duplicated or omitted because of the change sec_481 requires an adjustment to prevent the distortion for example if an accrual_method taxpayer included in income for year an amount which he had the right to receive but switched to the cash_method_of_accounting in year when he actually received the amount a sec_481 adjustment would be necessary to prevent the same item_of_income from being included in different tax years petitioner contends that because he adopted the mark-to- market method_of_accounting for his securities trading business in taxable_year 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 sec_481 adjustment is required and therefore there is no prejudice under sec_301_9100-3 proced admin regsdollar_figure continued in computing taxable_income sec_481 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 18cf sec_301_9100-3 example proced admin regs which provides as follows continued respondent contends that petitioner ignores the following parenthetical language in paragraph c ii or would require an adjustment under sec_481 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 sec_481 adjustment might possibly be necessary assuming arguendo that the parenthetical phrase in paragraph c ii did apply the interests of the government are not deemed to be prejudiced if unusual and compelling circumstances continued election not requiring adjustment under sec_481 taxpayer d prepares d’s income_tax return d is unaware that a particular accounting_method regulatory election is available d files d’s 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 in 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 i iii and iv of this sec do not apply under paragraph c ii of this section the interests of the government are not deemed to be prejudiced because the election does not require an adjustment under sec_481 are present sec_301_9100-3 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 sec_475 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 dollar_figure million in losses during the first quarter of taxable_year did not literally prevent petitioner from making the sec_475 election respondent further points out that petitioner failed to timely file the sec_475 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 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 c b pincite we briefly recount the facts of the instant case petitioner suffered a dollar_figure million loss when his trading accounts were liquidated on date days before the date prescribed in revproc_99_17 supra for timely filing a sec_475 election mr pearce petitioner’s tax adviser who had full knowledge of petitioner’s trading activities and losses and over years of experience as an accountant was unaware of the sec_475 election for securities traders mr sellers another accountant was also unaware of the availability of the sec_475 election as soon as petitioner learned of the existence of the sec_475 election he promptly employed caplin drysdale to make the sec_475 election and file a request for section 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 sec_301_9100-3 proced admin regs did apply in conclusion under sec_301_9100-3 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 sec_475 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 sec_475 election by the date prescribed in revproc_99_17 supra which is precisely the purpose of section 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 c b at dollar_figure we conclude that petitioner is entitled to an extension of time to file his sec_475 election pursuant to sec_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 19see supra note and accompanying text entitled to the benefits of a sec_475 election for the taxable_year as if he had timely filed the election to reflect the foregoing decision will be entered under rule


internal_revenue_service number release date index no cc psi - plr-116535-00 date x a b d1 year dear this responds to your letter dated date submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code the information submitted states that x was incorporated on d1 of year the shareholders of x are a and b a x's president represents that x relied on its attorney to prepare the necessary documents for purposes of obtaining x’s s_corporation status however the form_2553 election by a small_business_corporation for x was not filed a represents that it was a’s intent to have x elect to be an s_corporation effective d1 of year x filed its tax_return using form_1120s u s income_tax return for an s_corporation sec_1362 provides that if-- a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year based solely on the facts and the representations submitted we conclude that x has established reasonable_cause for failing to make a timely election to be an s_corporation effective for x’s tax_year beginning d1 of year accordingly provided that x makes an election to be an s_corporation by filing a form_2553 with the appropriate service_center effective for its year taxable_year within days following the date of this letter then such election will be treated as timely made for x’s year taxable_year a copy of this letter should be attached to the form_2553 except as specifically ruled upon above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provisions of the code including whether x was or is a small_business_corporation under sec_1361 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent office of the associate chief_counsel passthroughs and special industries sincerely yours j thomas hines branch chief branch enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index numbers washington dc person to contact telephone number refer reply to cc psi b09-plr-106335-03 date date legend taxpayer taxpayer date year trust dollar_figurex tax_return_preparer tax attorney year accounting firm dear this is in response to your representative’s letter dated date on behalf of taxpayer and taxpayer requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations and sec_2642 of the internal_revenue_code to make allocations of taxpayer 1's and taxpayer 2's generation-skipping_transfer gst tax exemptions to a transfer to a_trust the facts and representations submitted are summarized as follows on date in year taxpayer and taxpayer established the trust an irrevocable_trust for the benefit of their descendants on the following day taxpayer and taxpayer transferred property to the trust you represent that the value of this property was dollar_figurex the trust specifically provides for trust contributions to be fractionally divided a portion equal to the transferor’s unused gst_exemption is directed to be allocated to a gst exempt trust and the balance of the contribution if any is directed to be plr-106335-03 distributed per stirpes to taxpayer and taxpayer 2's then living descendants until the death of the last to die of taxpayer and taxpayer division date the trustee is to hold the gst exempt trust for the benefit of their children until the division date the trustee may pay to any one or more of taxpayer and taxpayer 2's children part or all of the income and principal of the gst exempt trust that the trustee in the trustee’s sole discretion believes desirable for the best interests of the children any undistributed_income of the gst exempt trust will be accumulated and from time to time added to principal as of the division date the gst exempt trust will be divided and allocated per stirpes among the living descendants of taxpayer and taxpayer and property so allocated will be retained in trust as a separate trust for that descendant each exemption trust will be held and disposed as follows the trustee will pay to or apply for the benefit of one or more of taxpayer and taxpayer 2's descendants such part or all of the income and principal of the trust as the trustee in the trustee’s sole discretion believes desirable for the comfortable maintenance health education and welfare of the descendant any undistributed_income of a_trust will be accumulated and from time to time added to principal at the death of a child of taxpayer and taxpayer that child has the power to appoint the trust principal and accrued or undistributed_income to one or more of taxpayer and taxpayer 2's descendants on the death of a person for whom an exemption trust is named any principal of the trust not effectively disposed of will be divided and allocated per stirpes among the living descendants of that person when a grandchild or more remote descendant of taxpayer and taxpayer for whom a_trust is named reaches the age of thirty years or on the division date if such person then has reached that age the balance of the trust will be distributed to such person taxpayer and taxpayer engaged tax_return_preparer and attorney to handle their tax matters year form sec_709 for taxpayer and taxpayer were not filed because attorney and tax_return_preparer mistakenly believed the year transfer to the trust qualified for the gift_tax annual exclusion and mistakenly believed an allocation of gst_exemption to the transfer was not required to fully exempt the transfer from the gst tax in year taxpayer and taxpayer engaged accounting firm as their tax_return_preparer accounting firm reviewed taxpayer 1's and taxpayer 2's records and determined that the year transfer did not qualify for the gift_tax annual exclusion and that an allocation of gst_exemption to the year transfer was required to exempt the transfer from the gst tax you have requested an extension of time under sec_2642 and sec_301_9100-1 and sec_301_9100-3 to make allocations of taxpayer 1's and taxpayer 2's gst exemptions for the transfer to the trust in year and that such allocation be made based on the value of the property transferred to the trust on date plr-106335-03 sec_2601 imposes a tax on every generation-skipping_transfer gst a gst is defined under sec_2611 as a taxable_distribution a taxable_termination and a direct_skip sec_2602 provides that the amount of the tax is the taxable_amount multiplied by the applicable_rate sec_2641 defines applicable_rate as the product of the maximum_federal_estate_tax_rate and the inclusion_ratio with respect to the transfer sec_2642 provides the method for determining the inclusion_ratio sec_2631 provides that for purposes of determining the inclusion_ratio every individual shall be allowed a gst_exemption of dollar_figure adjusted for inflation under sec_2631 that may be allocated by such individual or his executor to any property with respect to which such individual is the transferor sec_2632 provides that any allocation by an individual of his or her gst_exemption under sec_2631 may be made at any time on or before the date prescribed for filing the estate_tax_return for such individual’s estate determined with regard to extensions regardless of whether such a return is required to be filed sec_2642 provides that except as provided in sec_2642 if the allocation of the gst_exemption to any transfers of property is made on a gift_tax_return filed on or before the date prescribed by sec_6075 for such transfer or is deemed to be made under sec_2632 or c the value of such property for purposes of sec_2642 shall be its value as finally determined for purposes of chapter within the meaning of sec_2001 or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period its value at the time of the close of the estate_tax_inclusion_period and such allocation shall be effective on and after the date of such transfer or in the case of an allocation deemed to have been made at the close of an estate_tax_inclusion_period on and after the close of such estate_tax_inclusion_period sec_2642 provides generally that the secretary shall by regulation prescribe such circumstances and procedures under which extensions of time will be granted to make an allocation of gst_exemption described in sec_2642 such regulations shall include procedures for requesting comparable relief with respect to transfers made before the date of the enactment of sec_2642 which was enacted on date sec_2642 provides that in determining whether to grant relief the secretary shall take into account all relevant circumstances including evidence of intent contained in the trust instrument or instrument of transfer and such other factors as the secretary deems relevant for purposes of determining whether to grant relief the time for making the allocation shall be treated as if not expressly prescribed by statute notice_2001_50 2001_34_irb_189 provides that under sec_2642 the time for allocating the gst_exemption to lifetime transfers and transfers at death the time for electing out of the automatic allocation rules and the time for electing to treat plr-106335-03 any trust as a generation-skipping_trust are to be treated as if not expressly prescribed by statute the notice further provides that taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 sec_301_9100-1 provides that the commissioner has discretion to grant a reasonable extension of time under the rules set forth in sec_301_9100-2 and sec_301_9100-3 to make a regulatory election or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due_date is prescribed by a regulation and not expressly provided by statute under sec_301_9100-1 a regulatory election includes an election whose due_date is prescribed by a notice published in the internal_revenue_bulletin in accordance with sec_2642 and notice_2001_50 taxpayers may seek an extension of time to make an allocation described in sec_2642 or b or an election described in sec_2632 or c under the provisions of sec_301_9100-3 requests for relief under sec_301_9100-3 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 granting relief will not prejudice the interests of the government sec_301_9100-3 provides that a taxpayer is deemed to have acted reasonably and in good_faith if the taxpayer 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 based on the facts submitted and the representations made we conclude that the requirements of sec_301_9100-3 have been satisfied you are granted an extension of time of days from the date of this letter to make allocations of taxpayer 1's and taxpayer 2's respective available gst exemptions with respect to the transfer to the trust on date the allocations will be effective as of the date of the transfer to the trust and the allocations will be made based on the value of the property transferred to the trust as of the date of the transfer because original form sec_709 were not filed for year taxpayer and taxpayer should file original form sec_709 reporting the year transfer to the trust and allocating taxpayer 1's and taxpayer 2's available exemption to the transfer to the trust the form sec_709 should be filed with the internal_revenue_service center cincinnati oh a copy of this letter should be attached to each form_709 two copies are enclosed for this purpose the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury plr-106335-03 statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination except as specifically ruled herein we express or imply no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code in addition we express or imply no opinion regarding the value of the property transferred to the trust in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to the representatives listed on line and line of form_2848 power_of_attorney and declaration of representative this ruling is directed only to the taxpayers requesting it sec_6110 provides that it may not be used or cited as precedent sincerely heather c maloy heather c maloy associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes two copies of this letter


internal_revenue_service number release date index number ---------------------------------------------- -------------------------------------- ----------------------------------- ----------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ------------ telephone number --------------------- refer reply to cc fip b03 plr-103516-08 date date legend trust -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ fund a --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ----------------------------------------------------- ---------------------------------------------- fund b --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ----------------------------------- ---------------------------------------------- fund c --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ -------------------------------------- ---------------------------------------------- fund d --------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ---------------- ---------------------------------------------- fund e -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------ ---------------------------------------------- plr-103516-08 fund f -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------ ------------------------ ---------------------------------------------- state x administrator date date date date date date date date year dear ---------------- -------------------- ---------------------------------------------------- ------------------ ---------------- ------------------- ------------------- ------------------ -------------- ------------------------ ------------------------ ------- this responds to a letter dated date and subsequent correspondence submitted on behalf of fund a fund b fund c fund d fund e and fund f collectively the funds each fund requests an extension of time pursuant to sec_301_9100-3 of the procedure and administration regulations to elect under sec_855 of the internal_revenue_code to treat certain dividends distributed after the close of a taxable_year as having been paid during that taxable_year facts trust was organized on date as a state x trust and is registered under the investment_company act of u s c sec_80a-1 et seq as amended as an open- end management investment_company the funds are each a series of trust each fund has made an election to be taxed as a regulated_investment_company ric under plr-103516-08 subchapter_m of the code each fund files its federal_income_tax returns on a fiscal_year basis administrator provides fund administrative services for the funds these services include the preparation of the federal tax returns for the funds in year administrator instituted use of an on-line calendar to keep track of all tax_return due dates and processes that needed to be completed for the funds it administered when the calendar for the funds was updated on date to reflect the timely filing of extensions of time to file each fund’s federal_income_tax return for the taxable_year ended date the entry was incorrectly placed in an area of the calendar that pertained to the taxable_year ended date each fund’s federal_income_tax return for the taxable_year ended date was due on date the on-line calendar for the funds was checked on date but the calendar did not indicate that any_action was necessary as a result the forms for the funds for the taxable_year ended date were not timely filed to extend the due_date of the funds’ federal_income_tax returns for the taxable_year ended date from date to date the error was discovered on date on date the funds filed forms 1120-ric for the taxable_year ended date including with the returns the elections under sec_855 the funds represent that consistent with each fund’s prior distribution practices the funds intended to make elections to apply the spill-back provisions of sec_855 of the code to certain dividends_paid after the close of the taxable_year ended date the funds also represent that the dividend declaration and payment requirements of sec_855 are otherwise satisfied with respect to these dividends the elections were not timely made however due to the inadvertent failure to timely file forms for the funds each fund makes the following additional representations the request for relief was filed by the fund before the failure to make the regulatory election was discovered by the service granting the relief will not result in the fund having a lower tax_liability in the aggregate for all years to which the regulatory election applies than that taxpayer would have had if the election had been timely made taking into account the time_value_of_money the fund did not seek to alter a return position for which an accuracy- related penalty has been or could have been imposed under sec_6662 of the code at the time fund requested relief and the new position requires or permits a regulatory election for which relief is requested plr-103516-08 being fully informed of the required regulatory election and related tax consequences the fund did not choose to not file the election law and analysis sec_855 of the code provides that if a ric declares a dividend prior to the time prescribed by law for the filing of its return for a taxable_year including the period for any extension of time granted for filing such return and distributes the amount of such dividend to shareholders in the 12-month_period following the close of such taxable_year and not later than the date of the first regular dividend payment made after such declaration the amount so declared and distributed shall to the extent the company elects in such return in accordance with regulations prescribed by the secretary be considered as having been paid during such taxable_year except as provided in subsections b c and d sec_1_855-1 of the income_tax regulations sets forth the method of making the election and provides that the election must be made in the return filed by the ric for the taxable_year sec_301_9100-1 of the procedure and administration regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i set forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that 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 years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money plr-103516-08 holding based upon the facts presented and representations made by funds we hold that the funds have demonstrated good cause for the granting of relief under sec_301_9100-3 accordingly each fund’s election under sec_855 on its federal_income_tax return filed on date for the taxable_year ended date will be treated as having been timely made no opinion is expressed as to whether each fund's tax_liability is not lower in the aggregate for the year to which the election applies than that fund's tax_liability would have been if the election had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax returns involved the director will determine the fund's tax_liabilities for the year involved if the director determines that a fund's liability is lower that office will determine the federal_income_tax effect this ruling is limited to the timeliness of each fund’s election under sec_855 of the code this ruling does not relieve a fund from any penalty that it may owe as a result of its failure_to_file its federal_income_tax return on time except as specifically ruled upon above no opinion is expressed or implied as to any federal excise or income_tax consequences regarding fund in particular no opinion is expressed or implied whether any fund qualifies as a ric that is taxable under subchapter_m part of the code this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely alice m bennett branch chief branch associate chief_counsel financial institutions products enclosures copy of this letter copy for sec_6110 purposes cc


internal_revenue_service number release date index number 468a ------------------------ --------------------------------------- ------------------------ ----------------------- ----------------------- - department of the treasury washington dc person to contact ------------------------ id no ------------- telephone number --------------------- refer reply to cc psi - plr-114661-04 date june -------------------------------------------------- -------------------------------------------------------------------- re ------------------------------------------------------ taxpayer ------------------------ ------------------------------------------------------------------------------------------- parent ------------------------------------------------------------------------------------------- ------------------------ --------------------------------------------- ----------------------------------------------------- --------------------------------------------- --------------------------------- ------------------------------------------------------ plant location commission a commission b commission c state x order a order b engineer director dear ---------------- parent on behalf of taxpayer for a revised schedule of ruling amounts in accordance with sec_1_468a-3 of the income_tax regulations taxpayer was previously granted a revised schedule of ruling amounts for commission b on ----------------- the prior schedule this revised schedule has been requested because the prior ------------------ ----------------------------- ----------------------------------- ----------------------------- ----------------------------------------------------------------------------------- this letter responds to the request dated date submitted by plr-114661-04 schedule expired after the taxpayer’s ------- taxable_year information was submitted pursuant to sec_1_468a-3 tenant in common the plant is situated in location taxpayer as one of the owners of the plant has a ------ percent interest as a we understand the facts as presented by taxpayer to be as follows taxpayer is under the jurisdiction of commission a which covers -------- percent of taxpayer’s total sales and commission b which covers ------ percent however ------ percent of taxpayer s operations consists of sales of electricity to a public_utility that is subject_to the jurisdiction of commission c this request for a revised schedule of ruling amounts applies only to ruling amounts under the jurisdiction of commission b taxpayer proposes to decommission the plant using the prompt removal dismantling method taxpayer is under the audit jurisdiction of director in order b commission b authorized taxpayer to include decommissioning costs for the plant in its cost of service on a basis consistent with commission a s determination in order a commission a used an estimated cost of dollar_figure------------------------ ------------------------------------------------------------------------------------------------------- ------- dollars for decommissioning the taxpayer's interest in the plant this estimate was based upon an independent study by engineer which premised this estimate on the prompt removal dismantling method the decommissioning study estimated the base cost to decommission the plant as dollar_figure------------------ ------- dollars commission a’s method of calculating the amount of decommissioning costs included in cost of service does not include an escalation factor for computing estimated future decommissioning costs instead commission a provided for updating these estimated base costs in future ratemaking proceedings to then-current dollars according to commission b the estimated date on which the plant will no longer be included in taxpayer’s rate base for ratemaking purposes is ------- the estimated taxable_year in which substantial decommissioning costs of the plant will first be incurred is ------ the estimated taxable_year in which substantial completion of decommissioning of the plant will occur is ------- the assumed after-tax rate of return to be earned by amounts collected for decommissioning is -----percent the actual after-tax rate of return earned by the assets of the fund during the year ended december ------- was ------ percent with respect to commission b the following facts apply the funding_period and the level_funding limitation period for the plant extend from ------- through ------- decommissioning costs for the plant were included and will be included in the there are no proceedings before either commission that may result in an sec_468a of the internal_revenue_code provides that a taxpayer may plr-114661-04 taxpayer’s cost of service from ------- through ------ the projected annual amount that is included and will be included in taxpayer’s cost of service is dollar_figure-------- as determined in the first ratemaking proceeding in which the plant was included in taxpayer’s rate base the estimated_useful_life of the plant is --- years ------ through - ------- and the estimated period for which the portion of the fund relating to the plant will be in effect is --- years ------- through ------- therefore the qualifying percentage for the portion of the fund relating to the plant is ----- percent increase or decrease in the amount of decommissioning costs for the plant included in taxpayer's cost of service for ratemaking purposes elect to deduct the amount of payments made to a qualified nuclear decommissioning fund however sec_468a limits the amount_paid into the fund for any_tax year to the lesser_of the amount of nuclear decommissioning costs allocable to the fund that is included in the taxpayer's cost of service for ratemaking purposes for the tax_year or the ruling_amount applicable to this year sec_468a of the code provides that no deduction shall be allowed for any payment to the nuclear decommissioning fund unless the taxpayer requests and receives from the secretary a schedule of ruling amounts the ruling_amount for any_tax year is defined under sec_468a as the amount which the secretary determines to be necessary to fund that portion of nuclear decommissioning costs which bears the same ratio to the nuclear power plant as the period for which the fund is in effect bears to the estimated_useful_life of the plant this term is further defined to include the amount necessary to prevent excessive funding of nuclear decommissioning costs or funding of these costs at a rate more rapid than level_funding taking into account such discount rates as the secretary deems appropriate shall establish a qualified_fund with respect to each nuclear power plant to which such election applies sec_468a defines nuclear power plant to include any unit thereof sec_468a of the code provides that a taxpayer shall be deemed to have made a payment to the nuclear decommissioning fund on the last day of the tax_year if the payment is made on account of this tax_year within months after the close of the tax_year sec_1_468a-1 of the regulations provides that an eligible_taxpayer may elect to deduct nuclear decommissioning costs under sec_468a of the code an eligible_taxpayer as defined under sec_1_468a-1 is a taxpayer that has a sec_468 provides that a taxpayer that elects application of sec_468a sec_1_468a-2 of the regulations provides that the maximum amount of sec_1_468a-3 of the regulations provides that in general a schedule of plr-114661-04 qualifying interest in a nuclear power plant as defined under sec_1_468a-1 a qualifying interest is among other things a direct ownership_interest including an interest held as a tenant in common or joint tenant cash payments made or deemed made to a nuclear decommissioning fund during any_tax year shall not exceed the lesser_of the cost of service amount applicable to the nuclear decommissioning fund for such tax_year or the ruling_amount applicable to the nuclear decommissioning fund for such tax_year ruling amounts for a nuclear decommissioning fund is a ruling specifying annual payments that over the tax years remaining in the funding_period as of the date the schedule first applies will result in a projected balance of the nuclear decommissioning fund as of the last day of the funding_period equal to and in no event more than the amount of decommissioning costs allocable to the fund sec_1_468a-3 bases the schedule of ruling amounts on the reasonable assumptions and determinations used by the applicable public_utility commission s in establishing or approving the amount of decommissioning costs to be included in the cost of service for ratemaking purposes taking into account amounts that are otherwise required to be included in the taxpayer's income under sec_88 of the code and the regulations thereunder each schedule of ruling amounts shall be based on the public_utility commission's reasonable assumptions concerning i the after-tax rate of return to be earned by the amounts collected for decommissioning ii the total estimated cost of decommissioning the nuclear power plant and iii the frequency of contributions to the nuclear decommissioning fund for a tax_year to provide a schedule of ruling amounts identical to the schedule proposed by the taxpayer but no such schedule shall be provided by the service unless the taxpayer's proposed schedule is consistent with the principles and provisions of this section specified in a schedule of ruling amounts for any_tax year in the level_funding limitation period shall not be less than the ruling_amount specified in such schedule for any earlier tax_year under sec_1_468a-3 the level_funding limitation period begins on the first day of the first tax_year for which a deductible payment is made to the nuclear decommissioning fund and ends on the last day of the tax_year that includes the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes decommissioning costs allocable to a nuclear decommissioning fund is the taxpayer's sec_1_468a-3 of the regulations permits the internal_revenue_service sec_1_468a-3 of the regulations provides that the ruling_amount sec_1_468a-3 of the regulations provides that the amount of plr-114661-04 share of the total estimated cost of decommissioning the nuclear power plant multiplied by the qualifying percentage sec_1_468a-3 of the regulations provides that in general the total sec_1_468a-3 of the regulations provides that a taxpayer's share of the sec_1_468a-3 of the regulations provides that if two or more public_utility estimated cost of decommissioning a nuclear power plant is the reasonably estimated cost of decommissioning used by the applicable public_utility commission in establishing or approving the amount of these costs to be included in cost of service for ratemaking purposes total estimated cost of decommissioning a nuclear power plant equals the total estimated cost of decommissioning such plant multiplied by the taxpayer's qualifying interest in the plant commissions establish or approve rates for electric energy generated by a single nuclear power plant then the schedule of ruling amounts shall be separately determined pursuant to the rules of sec_1_468a-3 through e for each public_utility commission that has determined the amount of decommissioning costs to be included in the cost of service for ratemaking purposes for this plant under sec_1_468a-3 this separate determination shall be based on the reasonable assumptions and determinations used by the relevant public_utility commission and shall take into account only that portion of the total estimated cost of decommissioning that is properly allocable to the ratepayer whose rates are established or approved by the public_utility commission according to sec_1_468a-3 the ruling amounts for any_tax year is the sum of the ruling amounts for such tax_year determined under the separate schedules of ruling amounts service shall not provide a taxpayer with a schedule of ruling amounts for any nuclear decommissioning fund unless the public_utility commission that establishes or approves the rates for electric energy generated by the plant has determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes and has disclosed the after-tax rate of return and any other assumptions and determinations used in establishing or approving the amount sec_1_468a-3 of the regulations provides that a taxpayer is required to request a revised schedule of ruling amounts for a nuclear decommissioning fund if a any public_utility commission that establishes or approves rates for the furnishing or sale of electric energy generated by a nuclear power plant to which the nuclear decommissioning fund relates increases the proposed period over which the decommissioning costs of the nuclear power plant will be included in cost of service for ratemaking purposes adjusts the estimated date on which the nuclear power plant will no longer be included in the taxpayer's rate base for ratemaking purposes or reduces sec_1_468a-3 of the regulations provides that the internal revenue plr-114661-04 the amount of decommissioning costs to be included in cost of service for any_tax year and b the taxpayer's most recent request for a schedule of ruling amounts did not provide notice to the service of such action by any public_utility commission section a and c of the energy act eliminated for taxable years beginning after date the investment restrictions contained in sec_468a of the code section b and c of the energy act revised sec_468a by lowering the tax_rate applicable to a nuclear decommissioning fund for taxable years beginning after date we have examined the representations and data submitted by the taxpayer in relation to the requirements set forth in the code and the regulations based solely on these representations of the facts we reach the following conclusions taxpayer has a qualifying interest in the plant and is therefore an eligible_taxpayer under sec_1_468a-1 of the regulations commissions a and b have previously determined the amount of decommissioning costs to be included in the taxpayer's cost of service for ratemaking purposes as required by sec_1_468a-3 of the regulations the taxpayer as one of the owners of the plant has previously calculated its share of the total decommissioning costs under sec_1_468a-3 of the regulations the taxpayer subject_to the jurisdiction of three public_utility commissions for ratemaking purposes has previously calculated its share of the total decommissioning costs allocable to the commissions as required by sec_1_468a-3 of the regulations the taxpayer has previously proposed a schedule of ruling amounts which meets the requirements of sec_1_468a-3 and of the regulations the annual payments specified in the proposed schedule of ruling amounts are based on the reasonable assumptions and determinations used by the commissions and will result in a projected fund balance at the end of the funding_period equal to or less than the amount of decommissioning costs allocable to the fund the maximum amount of cash payments made or deemed made to the fund during any_tax year is restricted to the lesser amount of the decommissioning costs applicable to such fund or the ruling applicable to this fund as set forth under sec_1 468a- b of the regulations plr-114661-04 the qualifying percentage under sec_1_468a-3 of the regulations is calculated to be ----- percent based on the above determinations we conclude that the taxpayer's proposed schedule of ruling amounts satisfies the requirements of sec_468a of the code approved schedule of ruling amounts total commissions a and b tax years ------- through -------1 year a b ------------------------------------------------------------------ -------------------------------------------------------------------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------- limited to a 5-year period for the schedule of ruling amounts for commission b because the commission has not taken into account the statutory changes made to sec_468a of the code by the energy act the elimination of the investment restrictions and the reduction of the tax_rate applicable to income earned by the fund may result in a greater after-tax of return than was estimated prior to the enactment of the energy act by the commission this increased after-tax rate of return could over the life of the fund result in a balance in the fund on the last day of the funding_period that could exceed the amount of decommissioning costs allocable to the fund with agreement of the taxpayer this revised schedule of ruling amounts is thus in order to prevent the excess accumulation in the fund this schedule of approval of the schedule of ruling amounts is contingent on there being no ruling amounts is being limited to a 5-year period approval of a revised schedule of ruling amounts may be granted after a determination by commission b of an after-tax rate of return that accounts for the reduced_tax_rate and unrestricted investments change in the facts and circumstances known or assumed at the time the current ruling is issued if any of the events described in sec_1_468a-3 of the regulations occur in future years the taxpayer must request a review and revision of the schedule of ruling amounts generally the taxpayer is required to file such a request on or before the deemed payment deadline date for the first tax_year in which the rate sec_1 the ruling amounts for commission a were approved in a prior schedule of ruling amounts for purposes of the mandatory review required under sec_1_468a-3 of the regulations the date of that prior ruling shall govern the review period for the jurisdiction of commission a the approved schedule of ruling amounts is relevant only to those payments this ruling is directed only to taxpayer who requested it sec_6110 of plr-114661-04 reflecting such action became effective when no such event occurs the taxpayer must file a request for a revised schedule of ruling amounts on or before the deemed payment deadline of the 10th tax_year following the close of the tax_year in which the most recent schedule of ruling amounts was received made to the fund payments allocable to any funds other than the fund cannot qualify for purposes of the deduction under the provisions of sec_468a of the code as stated earlier payments made to such fund can qualify only to the extent that they do not exceed the lesser_of the decommissioning costs applicable to such fund or the ruling amounts applicable to this fund in the tax_year the code provides it may not be used or cited as precedent of the regulations a copy of this letter must be attached with the required election statement to the taxpayer's federal_income_tax return for each tax_year in which the taxpayer claims a deduction for payments made to the fund enclosure copy peter c friedman senior technician reviewer branch office of associate chief_counsel passthroughs and special industries a copy of this letter is being sent to the director pursuant to sec_1_468a-7 s peter c friedman sincerely yours