The Tax Court recently denied partial summary judgment in the case GWA LLC v. Commissioner (6981-19) based upon the reasoning that the mark-to-market election of a taxpayer’s disregarded entity (DRE) applied only to that DRE’s securities trading business.
The taxpayer, GWA, was formed as a partnership for federal tax purposes to serve as a holding company, while OGI conducted a securities trading business as a DRE.
GWA made a Section 475(f) mark-to-market election on its Form 1065 for 1998 on behalf of OGI. GWA included an attachment with its return stating that the mark-to-market election was made, “For OGI, which is engaged in a trade or business as a trader in securities and elects to have Section 475(f)(1) apply to such trade or business.” Shortly thereafter, GWA entered into certain transactions that were styled together as a call option that referenced a basket of securities.
The IRS took the position that GWA was the owner, in substance, of the basket securities and that the transactions were not options. The IRS also took the position that GWA made the “mark-to-market” election under Section 475(f)(1) and that the applicability of such election was not limited to OGI’s activities because OGI was a DRE.
Section 475(f)(1)(A) provides that securities traders may generally elect to use the mark-to-market method of accounting for securities. The primary issue in GWA LLC was whether the mark-to-market election applied solely to OGI’s trade or business or whether it applied entirely to GWA. Section 475(f)(1)(A) states, in pertinent part, 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…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…any gain or loss shall be taken into account for such taxable year.”.
GWA argued that the Section 475(f) election applied to OGI as the “person” as defined in Section 7701(a)(1). The IRS argued the election applied to GWA, however, because Rev. Proc. 99-17—the revenue procedure guidelines effective for making the election in 1998—consistently states that the election is made by the “taxpayer.”
The facts of the case do not appear to dispute that GWA otherwise correctly followed the procedures to file the accounting method change to make the mark-to-market election.
As noted above, Section 475(f)(1)(A) allows for the election to be made for a separate and distinct trade or business. Similarly, Rev. Proc. 99-17 states that the statement must describe the election being made, the first taxable year for which the election is effective, and, in the case of an election under Section 475(f), the trade or business for which the election is made. GWA’s election met all three requirements for OGI.
It is interesting to note that the Tax Court summary judgment opinion does not state that either party raised Section 446(d) as an argument to determine whether OGI is or is not a separate and distinct trade or business from GWA’s holding company’s activities. Generally, Section 446(d) provides that a taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business. One related factor that the Tax Court wanted to be further analyzed was if GWA entered into any trading activities itself. Presumably this would impact whether GWA may be allowed to treat OGI as a separate and distinct business that may choose to separately apply Section 475(f) if both GWA and OGI were traders in securities.
Sharon Kay is the National Managing Partner of Grant Thornton LLP's Washington National Tax Office. Sharon has over 25 years of tax experience and primarily advises clients on federal income tax issues such as accounting method changes, income and expense recognition, inventories, tangible and intangible asset capitalization and recovery, and certain business credits.
Washington DC, Washington DC
- Strategic federal tax
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