Section 475(e) or (f) revocation is now an automatic change
5-year waiting period to re-elect mark-to-market treatment
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The IRS has announced changes to the manner through which mark-to-market elections are revoked. Taxpayers that had made or were thinking of making a mark-to-market election under either section 475(e) or 475(f) found that the process to revoke this election was expensive and by no means guaranteed. Prior to the change, taxpayers wishing to revoke their ordinary mark-to-market accounting election needed advance consent from the IRS, which required a user fee as high as $7,000. The new process, as outlined in Rev. Proc. 2015-14, is relatively simple and painless. Advance consent and the attendant user fee are no longer required.
Taxpayers wishing to revoke a mark-to-market election must do so on a timely basis. In order to be considered timely, the revocation must occur by the due date of the return for the year immediately preceding the year of change. For example, if a taxpayer wishes to revoke its election beginning with the 2015 calendar year, the revocation must occur before the due date of the 2014 return (without regard to extensions). In addition, the taxpayer must request to use the realization method of accounting.
In order to change to the realization method of accounting, taxpayers must file Form 3115, Application for Change in Accounting Method. In addition, two specific items are required in connection with Form 3115 for purposes of revoking mark-to-market status: a notification statement and a final mark-to-market adjustment. There is no standard format for the notification statement. However, certain information is required:
- The name of the taxpayer requesting the change
- A statement that the taxpayer is requesting a change in accounting method from mark-to-market to realization
- The beginning and end dates for the year of change
- The type of instruments on which the change is being requested (i.e., section 475 securities, section 475 commodities, or both)
- A statement revoking the previous mark-to-market election
In other contexts, a Form 3115 requires a cumulative adjustment to taxable income to account for the effects of the change in accounting method. With the revocation of a mark-to-market election, however, no adjustment is required. Taxpayers simply need to make a final mark-to-market adjustment in the year immediately preceding the year of change. For example, if the realization basis is to be used in 2015 and thereafter, the taxpayer is required to mark-to-market its positions at the end of 2014. This final market value becomes the cost basis going forward on those positions. A five-year waiting period must elapse before a taxpayer can re-elect mark-to-market treatment using the automatic consent change procedures.