                          T.C. Memo. 2006-268



                      UNITED STATES TAX COURT



         STEVEN A. AND PATRICIA A. KNISH, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 323-05.                   Filed December 18, 2006.



     Thomas E. Brever and Barbara A. Olson, for petitioners.

     David L. Zoss, for respondent.



                          MEMORANDUM OPINION


     KROUPA, Judge:   This matter is before the Court on the

parties’ cross-motions for partial summary judgment, both filed

pursuant to Rule 121.1    We are asked to decide whether

petitioners and SPK, petitioners’ wholly owned S corporation,


     1
      All section references are to the Internal Revenue Code in
effect for the years at issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                  -2-

made effective mark-to-market elections for 2000 or 2001 under

section 475(f).    We hold that neither petitioners nor SPK made an

effective election for either year.     We shall therefore grant

respondent’s motion for partial summary judgment and deny

petitioners’ motion for partial summary judgment.

                             Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the accompanying exhibits are

incorporated by this reference.    Petitioners resided in Lonsdale,

Minnesota, at the time they filed the petition.

Petitioners’ S Corporation

     Petitioners owned and operated SPK, a road and sewer

construction company incorporated in 1991.2    Petitioner Patricia

Knish (Mrs. Knish) owned 80 percent of SPK’s stock while

petitioner Steven Knish (Mr. Knish) owned 20 percent of SPK’s

stock.

     SPK, an S corporation, filed its tax returns on Form 1120S,

U.S. Income Tax Return for an S Corporation, for 1996 through

2001.    Petitioners reported SPK’s S corporation items on their

joint tax return for each year from 1996 through 2001.

Changing SPK’s Business to Securities Trading
     Petitioners decided to change SPK’s business in 2000.     SPK

sold its operating assets and goodwill in February 2000 and made

nondividend property distributions to petitioners.     Mr. Knish

     2
      Petitioners’ S corporation was originally named Knish
Corp., but petitioners changed its name to SPK in 2001.   We
refer to petitioners’ S corporation as SPK.
                                -3-

then began trading securities using SPK’s remaining funds and

petitioners’ own funds.   He began trading securities in June 2000

and continued trading throughout 2001.    Petitioners allocated the

income, expenses, gains, and losses that resulted from the

securities trading between petitioners and SPK.

Petitioners’ and SPK’s 1999 Tax Returns

     Petitioners and SPK each timely filed a tax return for 1999

in April 2000.   Neither petitioners nor SPK attached any

statement to the returns electing to use the mark-to-market

method of accounting under section 475(f).

Attempts To Make Mark-to-Market Elections

     Petitioners and SPK each attempted in 2001 to make a mark-

to-market election for their securities trading activity,

intending that the elections be effective beginning in 2000.

Petitioners and SPK each filed Form 3115, Application for Change

in Accounting Method, with respondent and noted at the top that

the forms were filed pursuant to section 301.9100-2, Proced. &

Admin. Regs (section 9100).   Petitioners filed their Form 3115 in

October 2001, and SPK filed its Form 3115 in September 2001.

Neither petitioners nor SPK submitted any other document to

respondent seeking to elect the mark-to-market method of

accounting.

Tax Returns for 2000 and 2001
     Petitioners and SPK each timely filed their tax returns for

2000 and 2001.   Petitioners and SPK each requested extensions to

file their 2000 returns and timely filed them in October 2001 and
                                -4-

September 2001, respectively.   Petitioners and SPK attached

copies of the Forms 3115 they had filed to their returns for

2000.   The returns for 2000 and 2001 reflected that petitioners

and SPK each used the mark-to-market method of accounting for

their securities trading activity.    Petitioners and SPK each

reported ordinary losses for both years.    Petitioners reported

their own ordinary losses as well as their 100-percent share of

SPK’s ordinary losses for both years, totaling $2,333,698 in 2000

and $2,985,149 in 2001.

     Petitioners claimed a net operating loss for 2001 due to the

ordinary securities trading losses.    Petitioners seek to carry

this net operating loss back to tax years 1996 through 1999

pursuant to section 172.   Petitioners accordingly applied for

tentative refunds for 1996, 1997, 1998, and 1999, which

respondent disallowed.

Petitioners’ and SPK’s Requests for Letter Rulings

     Petitioners and SPK both requested that respondent issue

letter rulings concerning the effectiveness of their mark-to-

market election under section 475(f) for 2000.    Petitioners and

SPK also stated in their ruling requests that they should be

granted administrative relief from a late election under section

9100.   Petitioners and SPK each withdrew their requests for

letter rulings when they learned that the pending letter ruling

requests would be decided adversely to them.
                                 -5-

Deficiency Notice and Tax Court Proceedings

     Respondent issued petitioners a deficiency notice for tax

years 1996 through 2001.    Respondent determined in the deficiency

notice that the ordinary losses petitioners claimed in 2000 and

2001 from Mr. Knish’s and SPK’s securities trading activity were

capital losses.   Respondent determined that the losses were

capital losses because petitioners and SPK had not made effective

mark-to-market elections under section 475(f).    Respondent

determined alternatively that the losses were capital losses even

if petitioners and SPK made effective mark-to-market elections

because the securities trading activity was not a trade or

business activity.   Petitioners filed a timely petition.

     The parties filed cross-motions for partial summary judgment

on whether petitioners and SPK made effective mark-to-market

elections for the securities trading activity under section

475(f).

                             Discussion

Summary Judgment Standard

     We are asked to decide whether it is appropriate to grant

partial summary judgment.   Summary judgment is intended to

expedite litigation and avoid unnecessary and expensive trials.

See, e.g., FPL Group, Inc. & Subs. v. Commissioner, 116 T.C. 73,
74 (2001).   Either party may move for summary judgment upon all

or any part of the legal issues in controversy.    Rule 121(a).

The Court may grant partial summary judgment on a matter

concerning which there is no genuine issue as to any material
                                -6-

fact and a decision may be rendered as a matter of law.    See Rule

121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C. 226, 238

(2002).   We conclude that there is no genuine issue of material

fact regarding whether petitioners and SPK made effective mark-

to-market elections for Mr. Knish and SPK’s securities trading

activity, and a decision may be rendered as a matter of law.

     Respondent argues that petitioners and SPK failed to make

effective mark-to-market elections under section 475(f) pursuant

to Rev. Proc. 99-17, 1999-1 C.B. 503.   Respondent argues that

petitioners’ losses from the securities trading activity are

therefore capital losses regardless of whether the securities

trading activity was a trade or business.

     Petitioners argue that as they are traders in securities,

they are entitled to ordinary loss treatment for their securities

trading losses in 2000 and 2001 (and their 100-percent share of

SPK’s securities trading losses) because they and SPK each made

effective mark-to-market elections under section 475(f).

General Rules of the Mark-to-Market Accounting Method

     We begin by describing the general rules of the mark-to-

market accounting method.   A taxpayer engaged in a trade or

business as a trader in securities may elect to recognize gain or

loss on any security held in connection with the trade or

business at the close of the taxable year as if the security were

sold for its fair market value at yearend.   Sec. 475(f)(1)(A)(i);

see Lehrer v. Commissioner, T.C. Memo. 2005-167; Chen v.
Commissioner, T.C. Memo. 2004-132.    In general, gains or losses
                                 -7-

resulting from the mark-to-market election shall be treated as

ordinary income or losses.   Sec. 475(d)(3)(A), (f)(1)(D).     If a

taxpayer is in a business as a trader in securities and makes a

mark-to-market election with respect to sales of securities held

in connection with his or her business, the net loss from that

business will be an ordinary loss, deductible in full under

section 165(c)(1).   See secs. 165(a), (c), (f), 1211(b)(1);

Lehrer v. Commissioner, supra; Chen v. Commissioner, supra.

Conversely, if the mark-to-market election is not made, the net

loss is deductible only to the extent of any capital gains plus

$3,000.    See secs. 165(a), (c), (f), 1211(b)(1); Lehrer v.

Commissioner, supra; Chen v. Commissioner, supra.

Mark-to-Market Election Procedures

     We are asked to determine whether petitioners and SPK made

effective mark-to-market elections.    A mark-to-market election

may be made without the consent of the Secretary and, once made,

applies to the taxable year for which it is made and all

subsequent taxable years unless revoked with the Secretary’s

consent.   Sec. 475(f)(3).   Section 475 and the regulations do not

provide procedures that specify the time and manner of making a

mark-to-market election, although the Commissioner issued

proposed regulations in 1999.   Sec. 1.475(f)-1, Proposed Income

Tax Regs., 64 Fed. Reg. 4378 (Jan. 28, 1999).

     We look to the legislative history of section 475 to

determine congressional intent because the statute is silent as

to the procedures that must be followed to make a mark-to-market
                                   -8-

election.    See Lehrer v. Commissioner, supra.    The legislative

history indicates that the Secretary has authority to prescribe

the time and manner of the mark-to-market election.        H. Rept.

105-148, at 446 (1997), 1997-4 C.B. (Vol. 1) 323, 768; see Lehrer

v. Commissioner, supra.

     The Commissioner has prescribed procedures detailing the

requirements for a mark-to-market election pursuant to this

authority.    Rev. Proc. 99-17, supra.   A taxpayer wishing to make

a mark-to-market election must file a statement electing the

mark-to-market accounting method no later than the due date for

the tax return for the year immediately preceding the election

year.    Id. sec. 5.03, 1999-1 C.B. at 504.    This statement must be

attached to that tax return or to a request for an extension of

time to file that return.    Id.

     Petitioners and SPK argue that they made effective mark-to-

market elections for 2000.    We disagree.    Petitioners and SPK

were required to attach a statement electing the mark-to-market

accounting method to their respective tax returns for 1999 to

timely make a mark-to-market election for 2000.      Id.    Neither

petitioners nor SPK attached any election statement to the 1999

return.3    Instead, petitioners filed their election statement in

     3
      Petitioners argue that the mark-to-market election
procedure outlined in Rev. Proc. 99-17, 1999-1 C.B. 503,
effectively eliminates any opportunity to make the election in a
taxpayer’s first year of securities trading. While these
petitioners may not have been able to make the election in their
first year of trading, we do not find the rule invalid for this
reason. In fact, the transition rules of sec. 475 required
securities dealers to identify securities excepted from the mark-
                                                   (continued...)
                                 -9-

October 2001, and SPK filed its election statement in September

2001 with respect to their returns for 2000.    They did not attach

any election statements to their returns for 1999.    The election

statements they did file were each nearly 18 months late.

Accordingly, we conclude that petitioners and SPK did not make

effective mark-to-market elections in compliance with Rev. Proc.

99-17, supra, for tax year 2000.

     Petitioners argue in the alternative that their and SPK’s

ineffective attempts to make mark-to-market elections for 2000

should nevertheless be construed as valid elections for 2001.     We

disagree.    Petitioners have not cited any authority for us to

ignore the year in which they designated the election to be

effective.    There is no basis in Rev. Proc. 99-17, supra, to

construe the unsuccessful attempted mark-to-market elections for

2000 to be effective elections for 2001 instead.    Rev. Proc. 99-

17, supra, requires that the statement used to make the election

specify the first taxable year for which the election is


     3
      (...continued)
to-market election rules very promptly after enactment of the
law. See Notice 93-45, 1993-2 C.B. 334; see also Taxpayer Relief
Act of 1997, Pub. L. 105-34, sec. 1001(d)(2)(B), (4)(B)(i), 111
Stat. 908. The requirement to make the mark-to-market election
before the year it is to be effective in Rev. Proc. 99-17, supra,
is therefore consistent with the prospective operation of sec.
475 indicated by the transition rules’ prompt identification
requirements. We also note that new taxpayers (those for which
no tax return was required to be filed for the year preceding the
election year) may make a mark-to-market election in the first
year of their existence by placing a statement in their books and
records within a certain time. Rev. Proc. 99-17, sec. 5.03,
1999-1 C.B. at 504. While petitioners and SPK are not new
taxpayers under this provision, we note that the requirements of
Rev. Proc. 99-17, supra, are not as onerous as petitioners imply.
                                 -10-

effective.4    Id. sec. 5.04, 1999-1 C.B. at 505.   Petitioners’ and

SPK’s election statements designated 2000, not 2001, as the first

taxable year for which the election was to be effective.

Petitioners and SPK accordingly never made an election for 2001.

Instead, petitioners ask us to construe their invalid attempt to

make an election for 2000 as a valid election for 2001.        We

decline to do so.

        Moreover, the unsuccessful attempted elections for 2000 were

untimely even for tax year 2001.     Mark-to-market election

statements for 2001 would have had to be filed with SPK’s and

petitioners’ tax returns (or requests for extensions) by the due

dates of petitioners’ and SPK’s tax returns for 2000.5     Id. sec.

5.03.     Petitioners and SPK each attached their Forms 3115 to

their respective tax returns for 2000 that they filed in October

2001 and September 2001 pursuant to extensions.     Although

petitioners and SPK each requested extensions to file their

returns for 2000, they each failed to attach their Forms 3115 to

their requests for extensions to file as required.     SPK’s and

petitioners’ requests were therefore similarly untimely for 2001.

See id.    We conclude that petitioners and SPK did not make

effective mark-to-market elections under section 475(f) for 2001.




     4
      Cf. sec. 1362(b)(3) (treating an untimely S corporation
election as made for the next taxable year). There is no
comparable provision in sec. 475.
     5
      Petitioners’ tax return for 2000 was due on Apr. 16, 2001,
and SPK’s tax return for 2000 was due on Mar. 15, 2001.
                               -11-

     Petitioners also argue that Rev. Proc. 99-17, supra, is

invalid because section 475(g) restricts the Commissioner’s

ability to prescribe the time and manner of the mark-to-market

election only by regulation, not by issuing procedures.   We

disagree.   We have previously considered the validity of Rev.

Proc. 99-17, supra, and concluded that the Commissioner issued it

under the Secretary’s general authority to prescribe the time and

manner of the mark-to-market election.    Lehrer v. Commissioner,

T.C. Memo. 2005-167.   We also noted in Lehrer that the taxpayers’

election was so late that even without looking to Rev. Proc. 99-

17, supra, for guidance, we would still have concluded that the

taxpayers were not entitled to change their method of accounting.

Id. (citing Pac. Natl. Co. v. Welch, 304 U.S. 191, 194-195

(1938), and Wierschem v. Commissioner, 82 T.C. 718, 722-724

(1984)).

     We conclude, as we did in Lehrer, that Rev. Proc. 99-17,

supra, was validly issued under the Secretary’s authority to

prescribe the time and manner of the election.    Lehrer v.

Commissioner, supra.   Moreover, petitioners’ and SPK’s attempted

elections were nearly 18 months late.    We find, as in Lehrer,
that these attempted elections were too late to allow petitioners

and SPK to change their accounting method even absent the

guidance of Rev. Proc. 99-17, supra.

Availability of Section 9100 Relief

     Petitioners argue that, even if they and SPK did not make

effective mark-to-market elections under the revenue procedure,
                               -12-

they are entitled to relief under section 9100 and the

corresponding regulations.   We disagree.    Petitioners and SPK did

not administratively seek extensions of time to file mark-to-

market elections pursuant to section 9100.     They simply noted it

at the top of their Forms 3115.6    Neither did petitioners raise

the issue of section 9100 relief in the petition.

     We find that neither petitioners nor SPK would be entitled

to relief under section 9100 even if they had requested section

9100 relief and raised it as an assignment of error in the

petition.   Section 301.9100-3, Proced. & Admin. Regs., provides

administrative relief for late mark-to-market elections if

certain conditions are satisfied.     The Commissioner grants

requests for relief under this section if the taxpayer can show

that the taxpayer acted reasonably and in good faith and the

grant of relief will not prejudice the interests of the

Government.   Sec. 301.9100-3(a), Proced. & Admin. Regs.; see

Vines v. Commissioner, 126 T.C. 279 (2006).
     A taxpayer is deemed not to have acted reasonably and in

good faith if the taxpayer uses hindsight in requesting relief.

     6
      The notation at the top of petitioners’ and SPK’s Forms
3115, Application for Change in Accounting Method, indicates that
the Forms 3115 were filed “pursuant to section 301.9100-2.”
Relief under sec. 301.9100-2, Proced. & Admin. Regs., is
unavailable for extensions of time to file mark-to-market
elections under sec. 475(f) because it does not apply to
elections, like the mark-to-market election, that must be made by
the due date of the return without regard to extensions. Sec.
301.9100-2(b), Proced. & Admin. Regs.; Rev. Proc. 99-17, 1999-1
C.B. 503. Petitioners and SPK raised the issue of sec. 9100
relief in their ruling requests but did not further pursue sec.
9100 relief at the administrative level after they withdrew the
ruling requests.
                                 -13-

Sec. 301.9100-3(b)(3)(iii), Proced. & Admin. Regs.      The

Commissioner ordinarily will deny relief if specific facts have

changed since the due date for making the election that make the

election advantageous to a taxpayer.      Id.   A taxpayer attempting

to make a mark-to-market election years after it is due (while

continuing to trade in the meantime) in an attempt to convert

capital losses to ordinary losses is a classic example of a

taxpayer seeking to use hindsight.      Vines v. Commissioner, supra

at 293-294 (describing the facts of Lehrer v. Commissioner,

supra, as a classic example of taxpayers seeking benefit of

hindsight); Acar v. United States, 98 AFTR 2d 2006-6296, 2006-2

USTC par. 50,529 (N.D. Cal. 2006).      This is precisely what

petitioners and SPK are attempting to do.

     Petitioners and SPK attempted to make mark-to-market

elections nearly 18 months late to convert capital losses into

ordinary losses.   Unlike the taxpayer in Vines (who filed the

election only months late and discontinued trading during the

brief interlude), petitioners and SPK continued their trading

activities in the meantime.   See Vines v. Commissioner, supra;

Lehrer v. Commissioner, supra.    The facts here present yet

another example where a taxpayer seeks to use hindsight to make

the mark-to-market election when it is most advantageous.        See

Vines v. Commissioner, supra; Lehrer v. Commissioner, supra.

Accordingly, petitioners and SPK are deemed not to have acted

reasonably and in good faith and are not qualified for section

9100 relief.
                                 -14-

Conclusion

     We conclude as a matter of law that petitioners and SPK each

failed to make effective mark-to-market elections under section

475(f) for either tax year 2000 or tax year 2001.   Accordingly,

we shall grant respondent’s motion for partial summary judgment

and deny petitioners’ motion for partial summary judgment.

     To reflect the foregoing,


                                               An appropriate

                                        order will be issued.
