                        T.C. Memo. 2009-287



                      UNITED STATES TAX COURT



             SANJAY AND RASHMI KOHLI, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22971-08.                Filed December 14, 2009.



     Robert M. McCallum and Deborah R. Jaffe, for petitioners.

     Randall E. Heath, for respondent.



                        MEMORANDUM OPINION


     KROUPA, Judge:   This matter is before the Court on

respondent’s motion for partial summary judgment filed pursuant

to Rule 121.1   We are asked to decide if petitioner Sanjay Kohli

(Mr. Kohli) made an effective mark-to-market election for the

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

2000 taxable year under section 475(f).   We hold that Mr. Kohli

did not make an effective election, and therefore we shall grant

respondent’s motion for partial summary judgment.

                             Background

     We recite uncontested facts admitted in the petition,

respondent’s motion, petitioners’ objection to respondent’s

motion and the supporting memorandum, and in the exhibits

attached to these documents.   Petitioners resided in India when

they filed the petition.

     Mr. Kohli began working as a computer scientist for

Infospace, a startup technology firm, in 1996.   He received

Infospace stock options as part of his compensation package.     Mr.

Kohli began buying and selling securities while working at

Infospace and exercised some of the options for Infospace stock

worth $17 million in 1999.

     Mr. Kohli left Infospace in March 2000 to devote more time

to his securities activities2 and exercised the remaining options

for approximately $55 million worth of Infospace stock.    His

Infospace stock value declined dramatically by the end of 2000.

The total value of his remaining shares by year-end had plummeted

to almost $9.5 million, a decrease of $45 million.

     Mr. Kohli relied on the advice of a certified public

accountant (CPA) concerning all tax-related matters.   His CPA did

     2
      The extent of his transactions in stock is left for later
factual development.
                                 -3-

not advise him or discuss with him the tax ramifications of being

a full-time securities trader.   Petitioners timely filed a

Federal income tax return for 1999 but Mr. Kohli did not make any

election or attach any statement.

     Mr. Kohli hired a new CPA firm for 2000.   The new firm

informed him of the mark-to-market election for trading

activities.   In April 2001 Mr. Kohli filed an election to use the

mark-to-market accounting method for the 2000 taxable year as

well as a request for an automatic extension of time to file the

return for 2000.   He also filed a request for a private letter

ruling that he made a late but effective election of the mark-to-

market accounting method for 2000.

     Mr. Kohli reported $57 million as ordinary wage income, most

of which came from the exercise of the stock options in the

beginning of 2000 before he left Infospace.   He offset that

ordinary income by reporting a total ordinary loss of

$60,728,125.89 by using the mark-to-market method of accounting

for 2000.   This accounting method allowed him to claim a

deduction for the unrealized decrease in the value of Infospace

shares that he received from exercising his stock options in

2000.   Mr. Kohli also claimed over $1 million in ordinary losses

resulting from the sale of several thousand shares of stock in

2000.   Petitioners did not file the return for 2000 until October

15, 2001.   Respondent thereafter denied Mr. Kohli’s request to

elect the mark-to-market method of accounting for 2000.
                                -4-

     Respondent issued petitioners a deficiency notice for 2000

determining that the ordinary losses Mr. Kohli claimed in 2000

were capital losses because he had not made an effective or

timely mark-to-market election under section 475(f).3

Petitioners filed a timely petition.

     Respondent filed a motion for partial summary judgment on

whether Mr. Kohli made an effective mark-to-market election for

the 2000 tax year 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 as to

which there is no genuine issue as to any material 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 no genuine issue of material fact exists regarding

     3
      Respondent also determined alternatively that the losses
were capital losses even if Mr. Kohli made an effective mark-to-
market election because the securities trading activity was not a
trade or business. Whether Mr. Kohli’s activity constitutes a
trade or business is not before the Court in this motion; the
motion relates solely to the sec. 475 election.
                                 -5-

whether Mr. Kohli made an effective mark-to-market election for

the 2000 tax year, and a decision may be rendered as a matter of

law.

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 securities trader may elect to use the mark-to-

market accounting method to compute gain or loss on any security

held in connection with the trade or business.    Sec.

475(f)(1)(A)(i); see Knish v. Commissioner, T.C. Memo. 2006-268;

Lehrer v. Commissioner, T.C. Memo. 2005-167, affd. 279 Fed. Appx.

549 (9th Cir. 2008); Chen v. Commissioner, T.C. Memo. 2004-132.

A securities trader electing mark-to-market recognizes an

ordinary gain or loss on all securities held in connection with

the securities trading business as if the securities were sold at

the end of the year for fair market value.    Sec. 475(f)(1)(A)(i).

Any gain or loss must be taken into account that year.    Sec.

475(f)(1)(A)(ii).    Conversely, a taxpayer may deduct the net loss

only to the extent of any capital gain plus $3,000 if the

taxpayer does not properly elect to use the mark-to-market

method.    See secs. 165(a), (c), (f), 1211(b)(1); Knish v.

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

Commissioner, supra.    A mark-to-market election may therefore be

advantageous for a taxpayer who has incurred trading losses,
                                  -6-

realized or unrealized, while disadvantageous for a taxpayer who

has made trading gains.

Mark-to-Market Election Procedures

     Respondent asserts that Mr. Kohli’s mark-to-market election

was not timely.    The Commissioner has set forth the procedures

for making a mark-to-market election.      See Rev. Proc. 99-17,

1999-1 C.B. 503.    A taxpayer 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 504-505.     This statement

must be attached to that return or to a request for an extension

of time to file that return.     Id.    Mr. Kohli was therefore

required to make an election for 2000 by April 17, 2000, the due

date of the Federal income tax return for 1999, the year

preceding the year in which the election was to be effective.

Here, Mr. Kohli did not make the election for 2000 until April

27, 2001, over 12 months late.

Applicability of the Substantial Compliance Doctrine

     Mr. Kohli admits not filing the mark-to-market election with

the return for 1999 but cites the “substantial compliance

doctrine” to validate his election.      Courts have held that a

securities trader failed to make an election under section 475

where the trader did not follow the election requirements of Rev.

Proc. 99-17, supra.    Kantor v. Commissioner, T.C. Memo. 2008-297;

see Knish v. Commissioner, supra; Acar v. United States, 98 AFTR
                                -7-

2d 2006-6296, 2006-2 USTC par. 50,529 (N.D. Cal. 2006), affd. 545

F.3d 727 (9th Cir. 2008).   Mr. Kohli claims to have substantially

complied with the election rules by filing a late election

immediately upon discovering that an election could convert

capital losses to ordinary losses.

     We find that the substantial compliance doctrine4 has no

place in determining whether a timely election has been made.

Rev. Proc. 99-17, supra, fixes a deadline by which the election

must be made, a deadline that Mr. Kohli missed.    Mr. Kohli failed

to properly submit an election with the return for 1999 and did

not make an election until over 12 months later.   Accordingly, no

formulation of the substantial compliance doctrine would entitle

Mr. Kohli to relief.

Availability of Section 9100 Relief

     Mr. Kohli also claims he is entitled to relief under section

301.9100-3, Proced. & Admin. Regs. (section 9100 relief).    We

disagree.   A taxpayer may seek section 9100 relief for a late

mark-to-market election if certain conditions are satisfied.      The

Commissioner grants a request for section 9100 relief if the

     4
      The substantial compliance doctrine is a narrow equitable
doctrine that courts use to avoid taxpayer hardship if the
taxpayer establishes that he or she intended to comply with a
provision, did everything reasonably possible to comply with the
provision, but did not comply with the provision because of a
failure to meet the provision’s specific requirements. Samueli
v. Commissioner, 132 T.C. ___, ___ (May 18, 2009) (slip op. at
14-15); see also Sawyer v. County of Sonoma, 719 F.2d 1001, 1007-
1008 (9th Cir. 1983); Fischer Indus., Inc. v. Commissioner, 87
T.C. 116, 122 (1986), affd. 843 F.2d 224 (6th Cir. 1988).
                                 -8-

taxpayer establishes that he or she acted reasonably and in good

faith and the grant of relief will not prejudice the Government’s

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

v. Commissioner, 126 T.C. 279 (2006).    A taxpayer requesting

section 9100 relief should submit evidence, including affidavits,

supporting his or her claim.    Sec. 301.9100-3(e), Proced. &

Admin. Regs.

     A taxpayer is deemed not to have acted reasonably and in

good faith if the taxpayer uses hindsight in requesting relief.

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.   Here, respondent

determined in the private letter ruling that Mr. Kohli “failed to

demonstrate unusual and compelling circumstances * * * to

overcome the presumption of prejudice to the Government’s

interests.”    Priv. Ltr. Rul. 2002-09-052 (Mar. 1, 2002).

     Respondent argues Mr. Kohli has not acted reasonably and in

good faith because he used hindsight in requesting relief.       We

agree.   We find no difference between this case and numerous

cases where reasonableness and good faith were lacking when a

taxpayer attempted to make a mark-to-market election at least 12

months late to convert capital losses into ordinary losses while

continuing to trade.    See Knish v. Commissioner, T.C. Memo 2006-

268; Acar v. United States, supra.
                                 -9-

     We also reject Mr. Kohli’s argument that this case is

identical to the sole case in which we ruled that the taxpayer

acted reasonably and in good faith.    Vines v. Commissioner,

supra.   Mr. Kohli needed to make the election for the mark-to-

market accounting method by April 17, 2000, without regard to

extensions.    Unlike the taxpayer in Vines who filed the election

only two months late, Mr. Kohli elected the mark-to-market

accounting method 12 months after the election filing due date.

Moreover, the taxpayer in Vines conducted no trading activities

and incurred no losses between the due date of the election and

the date on which the taxpayer filed it.    In contrast, Mr. Kohli

claims losses for events that occurred well after the election

due date.    Mr. Kohli’s use of the year-end values to determine

losses under the mark-to-market method necessarily recognizes the

changes in market value that occurred after the election due date

of April 17, 2000.    This is yet one more example of a taxpayer

using hindsight to make the mark-to-market election when it is

most advantageous.    Accordingly, we find Mr. Kohli has not acted

reasonably and in good faith and does not qualify for section

9100 relief.

Conclusion

     We conclude as a matter of law that Mr. Kohli failed to make

an effective mark-to-market election under section 475(f) for

2000.    Accordingly, we shall grant respondent’s motion for

partial summary judgment.
                            -10-

To reflect the foregoing,


                                    An appropriate order will

                               be issued.
