DocketNumber: No. 22971-08
Citation Numbers: 98 T.C.M. 572, 2009 Tax Ct. Memo LEXIS 290, 2009 T.C. Memo. 287
Judges: \"Kroupa, Diane L.\"
Filed Date: 12/14/2009
Status: Non-Precedential
Modified Date: 4/18/2021
MEMORANDUM OPINION
KROUPA,
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 *291 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 activities 2 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 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 *292 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.
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 *293
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
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.,
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.
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
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
We find that the substantial compliance doctrine 4 has no place in determining whether a timely election has been made.
Mr. Kohli also claims he is entitled to relief under
A taxpayer is deemed not to have acted reasonably and in good faith if the taxpayer uses hindsight in requesting relief.
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. *299 See
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.
We conclude as a matter of law that Mr. Kohli failed to make an effective mark-to-market election under
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. The extent of his transactions in stock is left for later factual development.↩
3. Respondent also determined alternatively that the losses were capital losses even if Mr. Kohli made an effective mark-tomarket 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
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.
Fischer Industries, Inc. v. Commissioner of Internal Revenue , 843 F.2d 224 ( 1988 )
Acar v. Commissioner of Internal Revenue Service , 545 F.3d 727 ( 2008 )
Thomas B. Sawyer v. County of Sonoma and Retirement Board ... , 719 F.2d 1001 ( 1983 )