No Asperger exception to Section 475. It’s heads they win, tails you lose for capital gains and losses. If you have capital gains, they’re happy to tax them, no matter how many you have. If you have capital losses, you are limited to gains plus $3,000 per year, with the remainder carrying forward — even if you have to outlive Methuselah to use them up at $3,000 annually. Many sadder-but-wider former day traders have found themselves with this problem.
Section 475 offers some taxpayers a way out. If you qualify as a “trader,” a Section 475 election makes your losses fully deductible. It makes your gains ordinary, rather than capital, and it requires you to recognize gains and losses on your open positions at year-end, but that’s not a big deal for day traders. They tend to trade short-term, and short-term gains are taxed at ordinary rates anyway, and marking-to-market isn’t normally a big deal to them.
But Section 475 has a strict election requirement. You have to make the election no later than the April 15 of the year you want the election to take effect. For example, a taxpayer wanting to make the election effective for 2015 tax returns would have to make the election on his 2014 timely-filed 1040 due April 15, 2015.
A New York man claimed he made the election on his 2003 1040. Unfortunately, he made two serious mistakes. See if you can spot them in the Tax Court’s summary:
In 2003 on the advice of his accountant, petitioner intended to file a section 475(f) mark-to-market election. Petitioner, however, did not retain a signed copy of any election or any evidence of mailing it. Petitioner filed his Federal income tax return for the tax year 2003 on July 25, 2005. The 2003 tax return contained a statement that petitioner had made an election pursuant to section 475(f), but did not have a copy of Form 3115, Application for Change in Accounting Method, attached to it.
Error 1: Not keeping a copy of the election (assuming he made it).
Error 2: Not filing until over a year after the due date.
Other cases have shown that the IRS enforces the timely-filing requirements of Section 475 strictly, to keep taxpayers from making the election with the benefit of hindsight.
The Court ruled that he traded enough to qualify as a “trader” under the tax law, but that he blew the election (my emphasis):
We find that petitioner failed to comply with the requirements for the mark-to-market election set out in Rev. Proc. 99-17, supra. The evidence does not show conclusively whether petitioner signed or mailed a Form 3115 in 2003. Petitioner did not submit a copy of any executed version of Form 3115 or any evidence of mailing it. Respondent did not find any record of petitioner’s Form 3115 in his electronic database, but also admitted that in some years not all Forms 3115 received were actually entered in the database. Next, petitioner filed his Federal income tax return for 2003 on July 25, 2005, failing to comply with the filing deadlines.
There’s a lot in that paragraph. Perhaps the most important thing is that the IRS admits that it doesn’t always know what you file, so it’s wise to keep your returns forever in case something like this happens. The other thing is that the deadlines matter.
The taxpayer made an unusual argument to get out of penalties: that his Asperger Syndrome made it impossible to meet deadlines. The Tax Court wasn’t convinced:
For a number of years, including 2002 and 2003, petitioner worked as a high school teacher. There is no evidence in the record that at any time from 2001 through 2006 petitioner filed for a disability accommodation while he was employed as a school teacher. In 2007 petitioner was trading in securities. Petitioner’s work station was equipped with six monitors showing the status of his trades. Petitioner was able to collect, analyze, and organize information to base his trades on. Petitioner understood he had a duty to file tax returns but claims that in 2007 he was “despondent” because of the losses he suffered and could not organize himself to file a tax return timely.
We are sympathetic to petitioner’s plight. We cannot find, however, under these circumstances that petitioner’s mental condition prevented him from managing his business affairs.
This is consistent with other cases where the courts have found that if you are able to deal with the challenges of daily life, you are presumed to be able to file your returns on time.
The Moral: File your returns on time, and keep copies of your filings forever.
Cite: Poppe, T.C. Memo 2015-205.
Related: TaxProf, Tax Court: Asperger’s Syndrome Does Not Excuse Taxpayer’s Failure To File Tax Return
David Brunori calls the Iowa proposal to broaden the definition of manufacturing supplies subject to exemption from sales tax The Best Tax Policy Proposal of the Year (Tax Analysts Blog):
Taxing what business entities buy is wrong for two important reasons. First, businesses will try to pass the tax they pay on to their customers in the form of higher prices. Almost all succeed. The customers incur the tax burden without knowing it. That’s wrong. Even for those companies that don’t pass the tax along to customers, some person is unwittingly paying the tax. Second, when consumers pay higher prices, they are sometimes subject to tax. Thus, the sales tax is imposed on a value that includes previous sales tax. You may know it as cascading or pyramiding. But it’s wrong.
And that’s why the Iowa proposal is so refreshingly right. It would expand the types of business purchases exempt from sales tax. My understanding is that there is a debate in Iowa about whether the Department of Revenue can expand the number of exempt business purchases administratively. I don’t know the answer to that. I do know that the proposal represents sound tax policy.
Governor Branstad says expects the proposal to be enacted, reports the Sioux City Journal in Branstad: House GOP won’t buck rule change.
Russ Fox, The Wagering Excise Tax and DFS:
I’m focusing on the tax aspects of daily fantasy sports (DFS) this week. It’s beneficial for DFS participants for the activity to be considered gambling. For political reasons (“gambling is a sin”) and regulatory reasons (gambling is regulated, skill contests are not), the DFS sites want to be considered skill games sites. There’s another reason that DFS sites don’t want to be considered gambling: the wagering excise tax.
Picking the right horse at the track is a skill, too, but I’m pretty sure it counts as gambling.
Paul Neiffer, What is a Marginal Tax Bracket. A useful explanation for the non-specialist of how tax brackets work.
Kay Bell, Increased e-filing security planned for 2016 filing season. Better at least five years too late than never, I suppose.
Jim Maule, Beachfront House Rental Deduction Washed Out. When you try to deduct what looks like a beach party, you’d better have excellent documentation.
Eric Rasmusen, Law Suit for Billions Against Citigroup Because of Treasury’s 2009 Waiver of Section 382’s Rule about Losing NOL’s after an Ownership Change. The Administration put the fix in for its friends at Citigroup, and now another taxpayer is suing.
Tax Policy Blog, A Comparison of Presidential Tax Plans and Their Economic Effects.
Renu Zaretsky, “There’s no cut like a tax cut… There’s no cut like a tax cut…” Today’s TaxVox tax headline roundup covers the continuing fiscal pain in Kansas and the IRS patting itself on the back on ID theft after letting it spiral out of control for years.
TaxProf, The IRS Scandal, Day 895
Our media outlets dismiss the opponents of the Ex-Im bank or people who want to wind down Freddie and Fannie as Tea Party nut cases. If you want to stop crony capitalism, what we need are fewer influential media outlets and more Tea Party nut cases.