126 T.C. No. 15



                UNITED STATES TAX COURT



               L.S. VINES, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 12763-04.                     Filed May 11, 2006.



     P, a lawyer for over 34 years, settled a class
action law suit during 1999 and received compensation
for his legal services. P received approximately half
of the compensation in taxable year 1999 and half in
taxable year 2000 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 Apr. 14, 2000,
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 1999 tax
return on Apr. 17, 2000, P did not elect the mark-to-
market method of accounting pursuant to sec. 475(f),
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 June 2000, P learned of
the mark-to-market election for securities traders from
a friend, obtained the citation of sec. 475(f), I.R.C.,
and learned that Rev. Proc. 99-17, 1999-1 C.B. 503,
                               - 2 -

     required the election to be filed no later than the due
     date for the previous year’s tax return; i.e., Apr. 17,
     2000. P then employed a law firm to file the election
     and a request for relief pursuant to sec. 301.9100-
     3(c), Proced. & Admin. Regs. On July 21, 2000, 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. 17 and July 21,
     2000. P’s losses were exactly the same on July 21,
     2000, as they were on Apr. 17, 2000. In a Private
     Letter Ruling, dated Dec. 5, 2001, R denied P’s request
     for an extension of time to file the election pursuant
     to sec. 301.9100-3(c), Proced. & Admin. Regs.
     Subsequently, R determined deficiencies in tax for P’s
     taxable years 1999 and 2000.
          Held: P is entitled to an extension of time to
     file his sec. 475(f), 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(f), I.R.C., for the taxable year 2000 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 1999 and 2000 taxable years of $6,312,641 and

$6,835,942, respectively.1   The issue we decide is whether,

pursuant to section 301.9100-3, Proced. & Admin. Regs.,

petitioner should be granted an extension of time to file a


     1
      Respondent contends that petitioner in not entitled to
certain deductions for meals and entertainment for taxable year
1999, gifts to employees for taxable year 1999, and alimony
payments for taxable year 2000 all of which petitioner concedes.
                                - 3 -

section 475(f) election for his taxable year 2000.    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.2

At the time of filing the petition, petitioner resided in

Birmingham, Alabama.   Petitioner is an attorney who practiced

personal injury law in Birmingham, Alabama, for approximately 34

years.   During January 1994, petitioner began representing

certain plaintiffs in a national class action lawsuit that

settled with the defendants during 1999.    Petitioner received

approximately one-half of his compensation for settling the class

action suit during the taxable year 1999 and the other half

during the taxable year 2000.   Petitioner reported net profits of

$18,520,775 and $16,966,055 from his law practice on line 29 of

Schedule C, Profit or Loss From Business, of his Forms 1040, U.S.

Individual Income Tax Return, for taxable years 1999 and 2000,

respectively.



     2
      The 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.
                               - 4 -

     During August 1999, 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 $5 million in each of those

accounts.   Petitioner later established a brokerage account with

Terra Nova during December 1999.

     During the fall of 1999, petitioner decided to wind down his

law practice and begin a new career as a securities trader.

Previously, petitioner had traded in the stock market only

irregularly.   Between December 1999 and January 2000, petitioner

concluded the class action suit, transferred his remaining cases

to other attorneys, paid off the balance of the lease of his

downtown-Birmingham law office, and terminated the lease.     By

late January 2000, petitioner had spent a substantial amount of

money equipping and organizing one floor of his home as a

securities trading office.   Based on the volume and frequency of

petitioner’s trading, the parties have stipulated that petitioner

became engaged in the trade or business of trading securities on

January 28, 2000.

     Petitioner used margin borrowing as part of his securities

trading strategy.   On April 14, 2000, DLJdirect forced the

liquidation of petitioner’s entire account and terminated

petitioner’s trading on account of petitioner’s failure to cover

a margin call after technology stocks declined sharply during
                               - 5 -

early April, 2000.   As of April 14, 2000, petitioner’s net

trading losses totaled $25,196,151.54.   After his account was

liquidated on April 14, 2000, 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 30 years of experience, had

served as petitioner’s business and personal accountant for over

13 years.   Mr. Pearce had visited petitioner’s home several times

and was very familiar with petitioner’s securities trading

business.   He had seen all of petitioner’s trading-related

computers and equipment, helped hire some of the employees in

petitioner’s securities trading business, and reviewed daily

calculations of petitioner’s securities trading.

     On April 13, 2000, Mr. Pearce met with petitioner to obtain

his signature on Form 4868, Application for Automatic Extension

of Time to File U.S. Individual Income Tax Return, for the

taxable year 1999.   On April 17, 2000, petitioner timely filed

Form 4868, requesting an extension until August 15, 2000, to file

his return for taxable year 1999.   A section 475(f) election was

not enclosed with the Form 4868.    Because Mr. Pearce did not know

about the applicability of section 475(f) or any related Internal

Revenue Service (IRS) revenue procedure to securities traders,
                               - 6 -

Mr. Pearce did not advise petitioner of the availability of a

section 475(f) election.

     On or about June 4, 2000, Dr. James G. Sullivan (Dr.

Sullivan), a friend of petitioner, visited petitioner at his

home.   Dr. Sullivan had helped petitioner set up the computers

that petitioner used to conduct his securities trading business.

During Dr. Sullivan’s June visit, petitioner told Dr. Sullivan

that he had suffered significant losses during the first quarter

of the 2000 taxable year and that, consequently, his DLJdirect

account had been liquidated on April 14, 2000.   Dr. Sullivan knew

several professional “day traders” and informed petitioner that

he might be able to deduct his security losses as ordinary

losses.   Before Dr. Sullivan’s June visit, petitioner had no

indication that petitioner might be able to claim ordinary losses

for his securities trading business.

     On the next day, June 5, 2000, petitioner attempted to

contact another accountant, Charles E. Sellers (Mr. Sellers),

regarding the possibility of deducting his losses as a securities

trader.   On June 6, 2000, petitioner spoke with Mr. Sellers by

telephone and told him that Dr. Sullivan had suggested that

petitioner might be able to deduct his losses as a securities

trader as ordinary losses.    At the time of petitioner’s

telephone conversation with Mr. Sellers, Mr. Sellers was unaware

of section 475(f) and the mark-to-market election available to
                                - 7 -

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 section 475(f).    Dr.

Sullivan relayed the citation to petitioner, who in turn relayed

it to Mr. Sellers.

     Mr. Sellers informed petitioner that, according to Rev.

Proc. 99-17, 1999-1 C.B. 503, in order for a section 475(f)

election to be effective for the 2000 taxable year, petitioner

had to file the election by April 17, 2000, the due date for his

1999 tax return.   Mr. Sellers then informed petitioner that he

should qualify for an extension of time within which to make the

section 475(f) election under section 301.9100-3, Proced. &

Admin. Regs. (section 9100 relief).3

     Mr. Sellers recommended that petitioner hire other tax

counsel to make the section 475(f) election and to request

section 9100 relief.   Petitioner hired the Washington, D.C., law

firm of Caplin & Drysdale to prepare and file the section 475(f)

election and request for section 9100 relief.   On July 21, 2000,

Caplin & Drysdale, on behalf of petitioner, submitted to

respondent a “Taxpayer Election of Mark to Market Accounting

Under Section 475(f)” (section 475(f) election), along with a


     3
      Sec. 9100 relief is discussed in detail infra.
                               - 8 -

six-page letter outlining the reasons petitioner should qualify

for section 9100 relief to make the section 475(f) election for

the taxable year 2000.   The letter also stated that petitioner

would file a formal private letter ruling request.       Also enclosed

with the section 475(f) 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 Section 475(f).

     *        *          *       *        *          *          *

     The taxpayer is not requesting any change in the
     accounting methods used in his trade or business as an
     attorney and since the year 2000 is his first year in
     the trade or business of trading securities he is
     adopting a mark to market accounting method with regard
     to his trade or business of trading securities.

     *        *          *       *        *          *          *

     The taxpayer does not have to make any section 481(a)
     adjustment because he was not engaged in the trade or
     business of being a trader in securities prior to the
     year 2000. He is adopting a mark to market method of
     accounting for his trade or business as a securities
     trader which did not begin until 2000.

     *        *          *       *        *          *          *
                               - 9 -

     Based on the limited number of securities transactions
     in 1999 as set forth above and since [petitioner] was
     still engaged in the full time practice of law for all
     of 1999, it seems clear that he did not qualify as a
     trader in securities in 1999 and therefore has not
     adopted a method of accounting for his trade or
     business as a securities trader in any year prior to
     2000. For this reason, there is no adjustment under
     section 481(a).

     Caplin & Drysdale advised petitioner that he had bound

himself to adopt the mark-to-market method of accounting for his

trading business by filing the section 475(f) election and the

protective Form 3115 and requesting section 9100 relief on

July 21, 2000.   On that basis, Caplin & Drysdale advised

petitioner that he could resume his securities trading activities

without adversely affecting his request for section 9100 relief.

Mr. Sellers gave petitioner the same advice.   Based on Caplin &

Drysdale’s and Mr. Sellers’ advice, petitioner resumed his

trading activities on July 26, 2000.

     Between the date that petitioner should have filed his

section 475(f) election, April 17, 2000, and the date petitioner

actually filed his section 475(f) election, July 21, 2000,

petitioner:   (1) Did not purchase any publicly-traded stock; (2)

did not sell any publicly traded stock; and (3) had no gain or

loss from the disposition of any publicly traded stock.     Thus,

petitioner’s losses on July 21, 2000, were exactly the same as

they were on April 17, 2000.
                                  - 10 -

       On October 27, 2000, Caplin & Drysdale submitted to

respondent on behalf of petitioner a formal private letter ruling

request seeking section 9100 relief for his 2000 section 475(f)

election (section 9100 relief request).       Respondent required

petitioner to pay a $5,000 fee to file the section 9100 relief

request.

       When petitioner filed his section 9100 relief request on

October 27, 2000, the 2000 taxable year had not yet closed and

petitioner’s tax return for the 2000 taxable year was not yet

due.       Respondent had not imposed any accuracy-related penalty

under section 6662 with respect to either the 1999 or 2000

taxable year.

       On January 17, 2001, petitioner filed his Form 1040 for his

2000 taxable year, reporting all items based on the assumption

that his section 9100 relief request would be granted.

Petitioner reported a net loss of $26,768,761 from his securities

trading business on Schedule C of his Form 1040, attached Form

8275, Disclosure Statement, regarding his section 475(f)

election, and also attached a copy of the section 475(f) election

filed on July 21, 2000.4


       4
      Respondent’s technical case history indicates that
respondent told petitioner’s representative during a telephone
conference on Mar. 26, 2001, that “the Form 3115 and statement
are not binding on us and that he should tell the taxpayer to
file a protective election for 2001.” The technical case history
also indicates that, during a separate telephone conference on
                                                   (continued...)
                             - 11 -

     Following an adverse private letter ruling request

conference on September 25, 2001, respondent’s Office of Chief

Counsel (Financial Institutions & Products) issued a conference

report dated October 19, 2001, 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 9100 relief to obtain additional time to file the
     election.


     4
      (...continued)
Apr. 6, 2001, respondent told petitioner’s representative: “If
* * * [petitioner] is not granted section 9100 relief, he has to
make the election and follow the procedures for making the
election for year 2001 - So [petitioner] should think about a
protective election.”

     At the time respondent advised petitioner’s representative
to file a protective election for taxable year 2001, petitioner
had already filed his tax return for his 2000 taxable year on
Jan. 17, 2001. On Apr. 11, 2001, petitioner filed a document
captioned “Taxpayer Protective Election for Mark to Market
Accounting under Section 475(f)” for taxable year 2001.

     On Oct. 17, 2001, 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
Jan. 17, 2001, or the protective sec. 475(f) election he filed
on Apr. 11, 2001.

     The parties also dispute whether petitioner properly made a
valid sec. 475(f) election for his 2001 taxable year. We do not
reach that issue because, for reasons stated below, we hold that
petitioner is entitled to a sec. 475(f) election for his 2000
taxable year.
                           - 12 -

     *        *        *        *        *        *           *

     We would have done a regulation project if we had not
     believed section 301.9100-3 would prevent taxpayers
     from filing late elections.

     *        *        *        *        *        *           *

     The drafters of Rev. Proc. 99-17 did not want 9100
     relief to be available for 475(f) elections.

     On December 4, 2001, respondent’s Office of Chief

Counsel issued a section 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 §
     301.9100-3(b)(1)(i))?[5] Yes.

     *        *        *        *        *        *           *

     Is the taxpayer considered to have acted reasonably and
     in good faith, taking into account § 301.9100-
     3(b)(3)(i)-(iii)?[6]

     *        *        *        *        *        *           *

     It is unnecessary to reach conclusions pertaining to
     sections 301.9100-3(b)(3)(i)-(iii) due to the
     taxpayer’s failure to satisfy the requirements under
     section 301.9100-3(c)(2).[7]

     5
      Sec. 301.9100-3(b)(1)(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.
     6
      Sec. 301.9100-3(b)(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.
     7
      Sec. 301.9100-3(c)(2), Proced. & Admin. Regs., provides
special rules for accounting method regulatory elections, which
                                              (continued...)
                             - 13 -

     On November 2, 2001, petitioner filed a Form 1045,

Application for Tentative Refund, for his 2000 taxable year,

claiming a $4,030,143 decrease in income tax for taxable year

1999 on account of a claimed net operating loss carryback of

$9,880,708 from his 2000 taxable year.8

     On November 2, 2001, petitioner also filed a Form 1040X,

Amended U.S. Individual Income Tax Return, for his 1999 taxable

year to reflect the claimed net operating loss carryback of

$9,880,708 from his 2000 taxable year, as well as a net operating

loss carryover of $571,238 from his 1998 taxable year.    The

amended return reflected a total tax of $3,049,864.

     On December 5, 2001, respondent denied petitioner’s section

9100 relief request in Priv. Ltr. Rul. 129057-00 (200209053),

stating in pertinent part as follows:

     Because Taxpayer’s request for relief is denied
     pursuant to section 301.9100-3(c)(2) for lack of
     unusual and compelling circumstance, it is unnecessary
     for us to consider Taxpayer’s assertion that he acted
     reasonably and in good faith under section 301.9100-
     3(b), without using hindsight in requesting relief.
     * * *




     7
      (...continued)
presume prejudice to the interests of the Government absent
unusual and compelling circumstances. The application of sec.
301.9100-3(c)(2), Proced. & Admin. Regs., is a central issue in
the instant case and is discussed in greater detail below.
     8
      Respondent later denied petitioner’s refund request.
                               - 14 -

                               OPINION

     The issue we decide is whether, pursuant to section

301.9100-3, Proced. & Admin. Regs., petitioner should be granted

an extension of time to file a section 475(f) election for his

taxable year 2000.   Section 475(f) provides as follows:

          SEC. 475(f) Election of Mark to Market for Traders in
     Securities or Commodities.--

          (1) Traders in securities.--

               (A) In general.--In the case of a person who is
          engaged in a trade or business as a trader in
          securities and who elects to have this paragraph apply
          to such trade or business--

                    (i) such person shall recognize gain or loss
               on any security held in connection with such trade
               or business at the close of any taxable year as if
               such security were sold for its fair market value
               on the last business day of such taxable year, and

                    (ii) any gain or loss shall be taken into
               account for such taxable year.

          Proper adjustment shall be made in the amount of any
          gain or loss subsequently realized for gain or loss
          taken into account under the preceding sentence. The
          Secretary may provide by regulations for the
          application of this subparagraph at times other than
          the times provided in this subparagraph.

     In general, section 475(f) 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
                              - 15 -

day of the taxable year.   Any gain or loss must be taken into

account in that year.   Sec. 475(f)(1)(A)(i).

     If a qualified taxpayer makes a section 475(f) election, the

gain or loss on the sale or disposition of a security is treated

as ordinary income or loss.   Sec. 475(d)(3)(A)(i), (f)(1)(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 section 475(f)

election, gain or loss from the sale or disposition of a security

is treated as capital gain or loss.    See secs. 1221(a) and 1222.

Capital losses for individuals are subject to the capital loss

limitations under section 1211(b), which provides that capital

losses are allowed only to the extent of capital gains, plus

$3,000.   Petitioner has $35,486,830 in ordinary income from his

law practice and $26,768,761 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 January 28, 2000.

Accordingly, the parties do not dispute whether petitioner is

qualified to make a section 475(f) election; their primary

dispute is whether petitioner should be allowed the benefit of
                               - 16 -

section 9100 relief to extend the time to make the section 475(f)

election.

     Respondent relies on Rev. Proc. 99-17 sec. 5.03, 1999-1 C.B.

503, 504, which states in pertinent part as follows:

     SECTION 5. PROCEDURES FOR MAKING THE MARK-TO-MARKET
     ELECTIONS

     *          *        *        *        *        *        *

     .03 Elections effective for a taxable year beginning on
     or after January 1, 1999.

            (1) General procedure. * * * for a taxpayer to
            make a § 475(e) or (f) election that is effective
            for a taxable year beginning on or after January
            1, 1999, the taxpayer must file a statement that
            satisfies the requirements in section 5.04 of this
            revenue procedure. The statement must be filed
            not later than the due date (without regard to
            extensions) of the original federal income tax
            return for the taxable year immediately preceding
            the election year and must be attached either to
            that return or, if applicable, to a request for an
            extension of time to file that return. [Emphasis
            added.]

Accordingly, respondent contends that, pursuant to Rev. Proc. 99-

17 sec. 503, petitioner was required to file his section 475(f)

election by April 17, 2000, the due date for his 1999 tax return.

     Petitioner contends that he should be allowed the benefit of

section 9100 relief to extend the time to make the section 475(f)

election because he acted reasonably and in good faith and the

interests of the Government will not be prejudiced.9

     9
      Petitioner also contends that Rev. Proc. 99-17, 1999-1 C.B.
503, is invalid and unlawful because the plain language of sec.
                                                   (continued...)
                                - 17 -

Respondent contends that petitioner should not be allowed section

9100 relief to extend the time to make the section 475(f)

election because an election of the mark-to-market method of

accounting under section 475(f) is an accounting method

regulatory election.10    According to respondent, section 9100

relief is not available because section 301.9100-3(c)(2), 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 section

475(f) election, it impermissibly will give petitioner the

benefit of “hindsight”.

     The interpretation of section 301.9100-3(c), Proced. &

Admin. Regs., and the parties’ arguments regarding section 9100

relief create issues of first impression in this Court.    We begin

     9
      (...continued)
475(g) compels the Commissioner to issue regulations outlining
the procedures for making the sec. 475(f) election, which the
Commissioner did not do, and cites Zinniel v. Commissioner, 

 (1987), affd. 

 (7th Cir. 1989), in support
of his position.

     Because we hold, for reasons stated below, that petitioner
is entitled to sec. 9100 relief, we do not need to decide
questions relating to the validity of the limitations set forth
in Rev. Proc. 99-17, supra.
     10
      See sec. 301.9100-1(b), 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”.).
                             - 18 -

our analysis of section 301.9100-3(c), 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 § 301.9100 relief. The
     first is the policy of promoting efficient tax
     administration by providing limited time periods for
     taxpayers to choose among alternative tax treatments
     and encouraging prompt tax reporting. The second is
     the policy of permitting taxpayers that are in
     reasonable compliance with the tax laws to minimize
     their tax liability by collecting from them only the
     amount of tax they would have paid if they had been
     fully informed and well advised. [T.D. 8742, 1998-1
     C.B. 388, 389.11]

     Section 301.9100-3(a), Proced. & Admin. Regs., provides in

pertinent part as follows:

     § 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

     11
      The Secretary also expressed this view in the preamble to
temporary/proposed sec. 301.9100 regulations, T.D. 8680, 1996-2
C.B. 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.
301.9100 regulations, T.D. 8680, 1996-2 C.B. 194, where she
stated:

     I would agree that the 9100 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, 96 TNT 216-16 (Oct. 30,
     1996).]
                            - 19 -

     that the taxpayer acted reasonably and in good faith,
     and that the grant of relief will not prejudice the
     interests of the Government. [Emphasis added.]

Accordingly, the Commissioner must grant relief if the taxpayer

provides evidence establishing to the Commissioner’s satisfaction

that two conditions are satisfied:   (1) The taxpayer acted

reasonably and in good faith, and (2) the interests of the

Government will not be prejudiced by granting relief.

     In denying petitioner’s request for section 9100 relief,

respondent, in Priv. Ltr. Rul. 129057-00, stated the following:

     Because taxpayer’s request for relief is denied
     pursuant to section 301.9100-3(c)(2) for lack of
     unusual and compelling circumstances, it is unnecessary
     for us to consider Taxpayer’s assertion that he acted
     reasonably and in good faith under section 301.9100-
     3(b), without using hindsight in requesting relief.
     * * *[12]

Respondent’s contentions in the instant case are consistent with

respondent’s conclusions in Priv. Ltr. Rul. 129057-00.   We

disagree with respondent.   We conclude that petitioner acted

reasonably and in good faith and that the interests of the

Government are not prejudiced by allowing petitioner to file a

late election.




     12
      Respondent’s Chief Counsel 9100 File Memo. also states:
“It is unnecessary to reach conclusions pertaining to sections
301.9100-3(b)(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(c)(2).”
                              - 20 -

     Section 301.9100-3(b)(1), Proced. & Admin. Regs., defines

reasonableness and good faith as follows:

          (b) Reasonable action and good faith.-- (1) In
     general.-- Except as provided in paragraphs (b)(3)(i)
     through (iii) of this section, a taxpayer is deemed to
     have acted reasonably and in good faith if the
     taxpayer–

          (i) Requests relief under this section before the
          failure to make the regulatory election is
          discovered by the Internal Revenue Service (IRS);

          (ii) Failed to make the election because of
          intervening events beyond the taxpayer’s control;

          (iii) Failed to make the election, because after
          exercising reasonable diligence (taking into
          account the taxpayer’s experience and the
          complexity of the return or issue), the taxpayer
          was unaware of the necessity for the election;

          (iv) Reasonably relied on the written advice of
          the Internal Revenue Service (IRS); or

          (v) Reasonably relied on a qualified tax
          professional, including a tax professional
          employed by the taxpayer, and the tax professional
          failed to make, or advise the taxpayer to make,
          the election. [Emphasis added.]

The benchmarks for reasonableness and good faith in section

301.9100-3(b)(1), Proced. & Admin. Regs., are disjunctive; i.e.,

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 section 301.9100-3(b)(1)(i), Proced. & Admin.

Regs., there is no question that petitioner requested relief
                                - 21 -

before respondent discovered the failure to make the section

475(f) election.     Regarding section 301.9100-3(b)(1)(iii),

Proced. & Admin. Regs., pertaining to the exercise of reasonable

diligence, we note that while petitioner had practiced law for

over 30 years, he had only been in business as a securities

trader for approximately 3 months at the time respondent contends

he should have made his section 475(f) election; i.e., April 17,

2000.     Within a day of learning of the section 475(f) election

from Dr. Sullivan, petitioner contacted a new accountant, Mr.

Sellers.     Mr. Sellers was also unaware of section 475(f), but

petitioner retrieved the citation of section 475(f) from Dr.

Sullivan and provided it to Mr. Sellers.     Petitioner also

immediately hired Caplin & Drysdale to file the section 475(f)

election and request section 9100 relief.

     Regarding section 301.9100-3(b)(1)(v), Proced. & Admin.

Regs., which finds good faith where the taxpayer acts in

reasonable reliance upon counsel, petitioner was a personal

injury lawyer for over 34 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 professional.13

     13
      We note    that, although whether petitioner’s reliance was
reasonable is    not an issue, sec. 301.9100-3(b)(2), Proced. &
Admin. Regs.,    places a limit on reasonable reliance on a
qualified tax    professional. A taxpayer will not be considered to
                                                      (continued...)
                              - 22 -

Mr. Pearce has over 30 years of experience in tax and accounting,

has held numerous leadership positions within his field and had

extensive knowledge of petitioner’s trading activities and losses

from those activities.

     Section 301.9100-3(b)(3) provides three exceptions to the

general rule stated in paragraph (b)(1) 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 section 6662 at the time the taxpayer requests
     relief (taking into account any qualified amended
     return filed within the meaning of § 1.6664-2(c)(3) of
     this chapter) and the new position requires or permits
     a regulatory election for which relief is requested;

     (ii) Was informed in all material respects of the
     required election and related tax consequences, but
     chose not to file the election; or

     (iii) Uses hindsight in requesting relief. If specific
     facts have changed since the due date for making the
     election that make the election advantageous to a
     taxpayer, the IRS will not ordinarily grant relief. In
     such a case, the IRS will grant relief only when the
     taxpayer provides strong proof that the taxpayer’s
     decision to seek relief did not involve hindsight.

The first two exceptions of section 301.9100-3(b)(3), Proced. &

Admin. Regs., do not apply.   The parties dispute whether



     13
      (...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.
                                - 23 -

subdivision (iii) applies; i.e., 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 section 475(f) 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.[14]

     We reject respondent’s hypothetical, as well as respondent’s

contention.     Respondent’s contention is not consistent with the

plain reading of section 301.9100-3(b)(iii), Proced. & Admin.

     14
      An 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.
                              - 24 -

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 section 475(f) 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, T.C. Memo. 2005-167.     In that case, the taxpayers

sought to make a section 475(f) election for taxable years 1999,

2000, and 2001 in taxable year 2004.    The taxpayers reported

$44,000 of capital gains on their 1999 return, $313,715 of short-

term capital losses on their 2000 tax return, and $397,079 of

short-term capital losses on their 2001 return.    In 2004, the

taxpayers sought to make a section 475(f) election to escape the
                               - 25 -

$3,000 capital loss limitation.    The taxpayers in Lehrer are the

classic example of taxpayers who seek to use the benefit of

hindsight.15   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 section 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 section 301.9100-3(c)(2), Proced. &

Admin. Regs., which provides in pertinent part as follows:

     (2) Special rules for accounting method regulatory
     elections.-- The interests of the Government are deemed
     to be prejudiced except in unusual and compelling
     circumstances if the accounting method regulatory
     election for which relief is requested–

          (i) Is subject to the procedure described in
          §1.4461(e)(3)(i) of this chapter (requiring the
          advance written consent of the Commissioner);


     15
      The taxpayers in Lehrer v. Commissioner, T.C. Memo. 2005-
167, did not raise the issue of sec. 9100 relief. We held that
the taxpayers failed to file within the time prescribed by Rev.
Proc. 99-17, supra.
                           - 26 -

          (ii) Requires an adjustment under section 481(a)
          (or would require an adjustment under section
          481(a) if the taxpayer changed to the method of
          accounting for which relief is requested in a
          taxable year subsequent to the taxable year the
          election should have been made);

          (iii) Would permit a change from an impermissible
          method of accounting that is an issue under
          consideration by examination, an appeals office,
          or a federal court and the change would provide a
          more favorable method or more favorable terms and
          conditions than if the change were made as part of
          an examination; or

          (iv) Provides a more favorable method of
          accounting or more favorable terms and conditions
          if the election is made by a certain date or
          taxable year.

Accordingly, the interests of the Government are not deemed to be

prejudiced in the case of an accounting method regulatory

election if the provisions of section 301.9100-3(c)(2)(i), (ii),

(iii), or (iv), Proced. & Admin. Regs., do not apply or, if they

do, unusual and compelling circumstances are present.

     Section 301.9100-3(c)(1), 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
                             - 27 -

            affected by the election than the taxpayer would
            have had if the election had been timely made
            * * *.[16]

The interests of the Government are prejudiced if granting

petitioner an extension of time to file the section 475(f)

election would result in petitioner’s having a lower tax

liability than if petitioner had timely filed a section 475(f)

election.    The parties have stipulated that between April 17,

2000, the date petitioner should have filed his section 475(f)

election, and July 21, 2000, the date petitioner actually filed

his section 475(f) election, petitioner did not conduct any

trading activities and incurred no further gains or losses.

Accordingly, pursuant to section 301.9100-3(c)(1)(i), Proced. &

Admin. Regs., there is no prejudice in the instant case because

granting petitioner an extension of time to file his section

475(f) 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

     16
      The 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 9100 relief. Sec. 301.9100-3(c)(1)(ii), 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.
                                - 28 -

elections contained in section 301.9100-3(c)(2), Proced. & Admin

Regs.     The parties dispute whether section 301.9100-3(c)(2)(ii),

Proced. & Admin. Regs., applies.     Paragraph 3(c)(2)(ii) presumes

prejudice, absent unusual and compelling circumstances, if the

election “Requires an adjustment under section 481(a) (or would

require an adjustment under section 481(a) if the taxpayer

changed to the method of accounting for which relief is requested

in a taxable year subsequent to the taxable year the election

should have been made)”.

        Section 481(a) prescribes the rules for adjustments required

by changes in methods of accounting as follows:

             SEC. 481(a) General Rule.-- In computing the
        taxpayer’s taxable income for any taxable year
        (referred to in this section as the “year of change”)–

                  (1) if such computation is under a method of
             accounting different from the method under which
             the taxpayer’s taxable income for the preceding
             taxable year was computed, then

                  (2) there shall be taken into account those
             adjustments which are determined to be necessary
             solely by reason of the change in order to prevent
             amounts from being duplicated or omitted, except
             there shall not be taken into account any
             adjustment in respect of any taxable year to which
             this section does not apply unless the adjustment
             is attributable to a change in the method of
             accounting initiated by the taxpayer. [Emphasis
             added.17]

     17
      Sec. 1.481-1(a)(1), Income Tax Regs., contains almost
identical language regarding the purpose of the adjustment under
sec. 481(a). Rev. Proc. 99-17, sec. 204, 1999-1 C.B. at 504
itself corroborates this purpose:
                                              (continued...)
                             - 29 -

Accordingly, if a taxpayer changes his method of accounting and

an amount would be duplicated or omitted because of the change,

section 481(a) requires an adjustment to prevent the distortion.

For example, if an accrual method taxpayer included in income for

year 1 an amount which he had the right to receive, but switched

to the cash method of accounting in year 2 when he actually

received the amount, a section 481(a) adjustment would be

necessary to prevent the same item of income from being included

in 2 different tax years.

     Petitioner contends that, because he adopted the mark-to-

market method of accounting for his securities trading business

in taxable year 2000, the first year that his securities trading

business existed, and did not change from another method of

accounting, no item would be duplicated or omitted, no section

481(a) adjustment is required, and therefore there is no

prejudice under section 301.9100-3(c)(2)(ii), Proced. & Admin.

Regs.18

     17
      (...continued)
     In computing taxable income, § 481(a) 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.
     18
      Cf. sec. 301.9100-3(f), Example (4), Proced. & Admin.
Regs., which provides as follows:

                                                   (continued...)
                              - 30 -

     Respondent contends that petitioner ignores the following

parenthetical language in paragraph 3(c)(2)(ii):   “(or would

require an adjustment under section 481(a) if the taxpayer

changed to the method of accounting for which relief is requested

in a taxable year subsequent to the taxable year the election

should have been made)”.   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 section

481(a) adjustment might possibly be necessary.

     Assuming arguendo that the parenthetical phrase in paragraph

3(c)(2)(ii) did apply, the interests of the Government are not

deemed to be prejudiced if unusual and compelling circumstances


     18
      (...continued)
     Election not requiring adjustment under section 481(a).
     Taxpayer D prepares D’s 1997 income tax return. D is
     unaware that a particular accounting method regulatory
     election is available. D files D’s 1997 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(a)). In 1998, 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)(2)(i), (iii), and (iv) of this sec. do
     not apply. Under paragraph (c)(2)(ii) of this section,
     the interests of the Government are not deemed to be
     prejudiced because the election does not require an
     adjustment under section 481(a).
                                   - 31 -

are present.    Section 301.9100-3(c)(2), 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 section 475(f) 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 $25 million in losses during the first quarter of

taxable year 2000 did not literally prevent petitioner from

making the section 475(f) election.         Respondent further points

out that petitioner failed to timely file the section 475(f)

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
                              - 32 -

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. 8742, 1998-1 C.B.

at 390.   We briefly recount the facts of the instant case.

Petitioner suffered a $25 million loss when his trading accounts

were liquidated on April 14, 2000, 3 days before the date

prescribed in Rev. Proc. 99-17, supra, for timely filing a

section 475(f) election.   Mr. Pearce, petitioner’s tax adviser

who had full knowledge of petitioner’s trading activities and

losses and over 30 years of experience as an accountant, was

unaware of the section 475(f) election for securities traders.

Mr. Sellers, another accountant, was also unaware of the

availability of the section 475(f) election.   As soon as

petitioner learned of the existence of the section 475(f)

election, he promptly employed Caplin & Drysdale to make the

section 475(f) election and file a request for section 9100

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

section 301.9100-3(c)(2)(ii), Proced. & Admin. Regs., did apply.
                                 - 33 -

     In conclusion, under section 301.9100-3(c)(1)(i), 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 section

475(f) 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 section 475(f) election by the date

prescribed in Rev. Proc. 99-17, supra, which is precisely the

purpose of section 9100 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. 8742, 1998-1 C.B. at 389.19   We conclude that

petitioner is entitled to an extension of time to file his

section 475(f) election pursuant to section 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




     19
          See supra note 11, and accompanying text.
                             - 34 -

entitled to the benefits of a section 475(f) election for the

taxable year 2000 as if he had timely filed the election.

     To reflect the foregoing,


                                        Decision will be entered

                                   under Rule 155.