Mark D. & Jennifer L. Summitt, Petitioner

I Ss vrvoEb- "PorU S 134 T .C . No . 1 2

UNITED STATES TAX COUR T

MARK D . AND JENNIFER L . SUMMITT, Petitioners COMMISSIONER OF INTERNAL REVENUE, Respond e V .

t Docket No . 13893-07 . Filed May 20 , 2010 .

P-H is a 10-percent shareholder in S, an S orporation .

On Sept . 23, 2002, S paid premiums to acquire tw foreign currency options from B and received pre it sold . two written minor foreign currency optio The purchased major foreign currency options wer reciprocal put and call, exactly offsetting each written minor foreign currency options also were reciprocal put and call, exactly offsetting each Sept . 25, 2002, S assigned the major foreign cur option and the minor foreign currency call optio charity pursuant to an assignment agreement . in w charity was substituted for S with respect to al obligations under the minor foreign currency ca l majo r iums when as to B .

a other . The a other . On ency call to a ich the 1 option .

R filed a motion for partial summary judgme determination (1) that S did not recognize loss 1256, I .R .C ., upon its assignment of the major f currency call option to charity, and ._(2) that S recognize gain upon its assignment of the minor call option to'charity .

it seeking a under sec . oreig n must currenc y SERVED May 20 2010 Ps contend (1) that the major foreign currency call option assigned to the charity is a sec . 1256, I .R .C ., foreign currency contract so that loss, if any, on the assignment of that option was recognized by S in 2002 under the marked-to-market rules of sec . 1256(a) and (c), I .R .C ., and (2) that gain, if any, on the assignment of the minor foreign currency call option to the charity was not recognized by .S because the minor foreign currency option was not a sec . 1256, I .R .C ., contract and the assignment by S to the charity did not terminate the option .

Held : Under sec . 1256, I .R .C ., the major foreign currency call option is not a foreign currency contract as defined in sec . 1256(b) (2) and (g) (2), I .R .C ., and the marked-to-market provisions of sec . 1256, I .R .C ., do not apply to enable S to recognize the loss on the assignment of the major foreign currency option to the charity .

Held , further , there are genuine issues of material fact remaining with respect to the .income tax treatment of .the assignment of the minor foreign currency call option to the charity that require trial .

John E . Rogers and Colin C . Laitner , for petitioners .

John Comeau and Jeffrey Dorfman , for respondent .

OPINIO N

HAINES, Judge : This case is before the Court on respondent's motion for partial summary judgment pursuant to Rule 121 .1 Respondent raises two issues for decision in his motion :

(1) Whether under the marked-to-market rules of section 1256 J .

'Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), as 'amended, and all Rule references are to the Tax Court Rules of Practice and Procedure . Amounts are rounded to the nearest dollar .

Summitt, Inc .- (Summitt), an S corporation, recognized loss upon its .assignment to charity of a ,major foreign currency call option, and (2) whether Summitt was required to include in its income, upon its assignment to charity of a minor for ign currency call'option, the premium it received as writer of that option .

The following facts are based-upon the parties' leadings, affidavits, and exhibits in support of and in opposition to the motion for partial summary : judgment . They are'stated solely for the purpose of deciding the motion and not .as finding of fact in this case . See Fed . R . Civ . P . 52(a) .

Background The loss petitioners claim came from Summitt's offsetting foreign currency option transactions, the income tax effects of which flowed through to petitioners' joint 2002 Federal income tax return . Summitt is a California corporation with it s principal place of business in San Clemente . Summitt was incorporated on March 25, 1996, and elected on April 1, 1997, to be treated as an S corporation under section 1361(a)(1) .

Petitioner Mark D . Summitt (petitioner) is a 10-percent shareholder in Summitt . Petitioners resided in Monrovia, California, at the time the petition was filed .

During 2002 Summitt engaged Multi National Strategies, LLC (Multi National), located in New York City, to provi e advice with respect to foreign currency option transactions and to serve as depositary for funds needed for the transactions . On September 10, 2002, Summitt entered into agreements with Beckenham Trading Co .-, Inc . (Beckenham), with its principal place of business in Fort Lee, New Jersey, to engage in cross-currency transactions . The agreements between Beckenham and Summitt recited that the transactions were intended to . be exempt from, and otherwise not subject to, regulation under the Commodity Exchange Act . Beckenham was designated the calculation agent for the transactions to determine all amounts due to or from each party in accordance with terms specified in the agreements with Summitt .

On September 21, 2002, Summitt authorized Multi National to purchase two 180-day major foreign currency options² and to sell on behalf of Summitt two 180-day written minor foreign currenc y options .' On September 23, 2002, Summitt purchased from Beckenham two major currency options, each pegged to the U .S .

dollar (USD) and the European Union euro (EUR) . The majo r 2A major foreign currency is a "currency in which positions .are * * * traded through regulated futures contracts" . Sec . 1256(g)(2)(A)(i) . The term "regulated futures contract", as defined in sec . 1256(g)(1), means "a contract--(A) with respec t ~.to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and (B) which is traded on or subject to the rules of a qualified board or exchange ." Major currencies include the U .S . dollar, British pound, Japanese yen, Swiss franc, and European Union euro .

'Minor currencies include Danish krone .

currency options were a reciprocal put and call, exactly offsetting each other . The purchased-major options moved inversely in value to one another over the 180-day period, thus ensuring that Summitt would hold a loss position in one of the two purchased options . The EUR call option (cid:127)(3032) an the EUR put option (3033) had a notional value of EUR 357,580 711, a strike price of $0 .9788 USD/EUR, and an expiration da e of March 21, 2003 .

The party obligated to perform if the holder exe cises the option is the writer of the option . Beckenham was th writer of the major-currency options and obligated itself to perform at the discretion of Summitt . As the purchaser and holder o the major currency call option, Summitt, by exercising the opti n, could require Beckenham to-deliver the euro at a price of $D .9788 USD/EUR . As the purchaser and holder of the put opti n, Summitt, by exercising the option, . could require Beckenham to take delivery of the euro at a future date or dates at a price of $0 .9788 USD/EUR . The price specified in the contract at which the euro would be purchased pursuant to-exercise of the put or call option is the strike price .

On the same day that Summitt purchased the major .currency options, Summitt wrote and sold to Beckenham two minor currency options, each pegged to the USD and the Danish krone (DKK) . Th e 'The numbers in parentheses are trade references used to identify the various option' transactions .

6 - written minor currency options .were a reciprocal put and call, exactly offsetting each other . The written minor options moved inversely in value to one another over the 180-day period, thus ensuring that Summitt would hold a gain position in one of the two minor currency options . . The DKK call option (3034) and the DKK put option (3035) had a notional value of DKK 2,661,225,000 with a strike price of 7 .6035 DKK/USD and a bonus payout of DKK 10,162,040 if the DKK/USD strike price was greater than 7 .2586 DKK . The expiration date for both minor currency options was March 21, 2003 .

Summitt, the writer of the minor currency options, obligated itself to perform at the discretion of Beckenham . As the purchaser and holder of the minor currency call option, Beckenham, by exercising the option, could require Summitt to deliver Danish kroner at a price of 7 .6035 DKK/USD . As the purchaser and holder of the put option, Beckenham, by exercising the option, could require Summitt to take delivery of kroner at a future date or dates at a price of 7 .6035 DKK/USD .

The values of the two foreign currencies underlying the purchased major and written minor options historically have demonstrated a very high positive correlation with each other .

As the currencies change in value ..because of exchange rate fluctuations, Summitt could reasonably expect to have the following potential gains and losses in substantially offsetting positions : (1) A loss in a purchased major option ani a gain i n a written minor option, and (2) a gain in a ,purchased major option and a loss in a written minor option . At any ime, Summitt's loss in the purchased major option that ha d declined i n value might be more or less than Summitt's gain in t h offsetting written minor option . that had appreciated in value .

imilarly, Summitt's gain in the remaining purchased major opti o might be more or less than Summitt's-loss inthe remaining wr i ten mino r option.

The premiums Beckenham charged for the major cur :enc y options totaled $ 19,967 , 500, consisting of"a $9,983,70 premium for the EUR call option (3032) and a $9,983,750 premi m for th e EUR put option (3033) . The premiums charged by Summi t for the minor currency options totaled $19,950,000, consisting of a $9,975,000 premium for the DKK call option (3034) and a $9,975,000 premium for the DKK put option (3035) . The ne t premium paid by Summitt in respect of the two major an d two,mino r options was $17,500 .5 Two days later, on September 25, 2002, Summitt assigned to the Foundation for Educated America, Inc . (charity), the EUR call option (3032) and the DKK call option (3034) .6 At the time o f 'Total premiums of $19,967,500 charged for the t o major currency options less total premiums received of $19,950,000 for the two minor currency options .

'Schedule A to the assignment agreement, corporate minutes, .

(continued .

.

) the assignment, the potential .

.. loss on the EUR call option (3032 .)

was $1,750,535, and the potential gain on the DKK call option (3034) was $1,745,285 . On December 12, 2002, Summitt closed out the EUR put option (3033) and the DKK put option (3035) b y ,agreeing with Beckenham to offset those options against each other .

In 2003 Summitt filed a Form 1120S, U .S . Income Tax Return for an S Corporation, for 2002 (original return) reporting gross receipts of $21,258,592 less $18,739,492 cost of goods sold , resulting in a gross profit of .$.2,519,100 ., .Summitt also reporte d the following currency transactions on Statement 6 attached t o the return :

6( .

. .continued) and correspondence all designate Sept . 25, 2002, as the effective date .

Option Property description EUR Call

EUR 357,580,711

EUR Put

EUR 357,580,711

DKK Put

DKK 2,661,225,000

Trade 3032 3033 3035 Date acquired Trade Date sold Gross sale pr ice' Cost o r other basis² Gain/los s 9/23/02 3040 312/12/02 $8,233,215 °$9,992,500 ($1,759,285 ) 9/23/02 3041 59/25/02 11,724,660 9,983,750 1,740,91 0 9/23/02 3043 12/12/02 9,975,000 11,720,285 (1,745,285)

AUD 80,594,595

AUD 80,594,595

EUR 37,500,000

EUR 37,500,000

AUD 60,000,000

AUD 60,000,000

11/6/02 11/8/02 12/11/02 12/12/02 12/26/02 12/31/02 11/6/02 868,084 870,584 11/8/02 1,332,625 1,329,514 12/11/02 480,636 483,136 12/12/02 583,748 580,998 12/26/02 531,768, 533,768 12/31/02 308,539 306,689 .

(2,500) 3,11 1 (2,500 ) 2,75 0 (2,000 ) 1,85 0 (1,762,949 ) Total 'The gross sale price for each minor option was the premium paid by Beckenham to Summitt, writer of the options . The gross sale price for each major option was determined by Beckenham .

'The cost or other basis for each major . option was the premium paid by Summitt to Beckenham .

The cost for each minor option was determined by Beckenham .

3032, and the second is option 3033 . The return transposes the dates transferred/closed : 3032-was transferred on Sept . 25, 2002, and 3033 was closed on Dec . 12, 2002 . .

4Note that the amount reported on the return is $9,992,500 .

The premium was $9,983,750, and the $8,750 difference is unexplained .

'The date should be Dec . 12, 2002, per n .3 to above to Statement 6 .

Summitt did not report gain from the disposition of the DKK call option (3034) on its original return . The $1,762,949 loss from Statement 6 was subtracted from gross profit of $2,519,100 to arrive at total income of $756,151 . Business deductions of $691,424 were claimed, resulting in ordinary income of $64,727 .

As a 10-percent shareholder of Summitt, petitioner reported $6,473 ordinary income from Summitt on his timely filed joint Form 1040, U .S . Individual Income Tax Return, for 2002 .

Summitt filed a first amended Form 112 .05 for 2002 (first t'! amended return) on January 8, 2004, reporting the same gross receipts, cost of goods sold, and gross profit shown on the original return . However, Summitt amended the currenc y transactions reported on Statement 6 attached to the return by adding the following entry to report the gain on the DKK call option (3034) Gross Cost or Property Date bate sales othe r Option description Trade acquired Trade sold pr ice basis Gain/los s DKK Call DKK 2,661,225,000 3034 9/23/02 , 3042 9/25/02 $9,975,000 $8,229,715 $1,745,285 By reporting the gain of $1,745,285 from the disposition of the DKK call option (3034), the $1,762,949 loss reported on the original return was reduced to $17,664 on the first amended return . As a result, rather than reducing gross profit of $2,519,100 by $1,762,949, gross profit was reduced by $17,664 on - 1 1 the first amended return resulting in total income of $2,501,436 .

Subtracting the claimed business deductions of $691,424 , unchanged from the original return, resulted in repor :ed ordinary income of $1,810,012 .

On January 9, 2004, petitioners filed a first amended return for 2002 on which they increased their flow-through income from Summitt to $181,001 . Petitioners' first amended return reported an additional tax due of $64,779 . . The Internal Revenue Service (IRS) assessed this additional tax and on April 5, 20o⁴ , petitioners paid the tax, including interest, in the total amount of $67,432 .

On February 14, 2007, Summitt attempted to file second amended return for 2002-, which reinstated its position that the receipt of a premium on the DKK call option (3034) was not taxable . The second amended return was a restatement of the original return . . Petitioners also attempted to file .second amended return for 2002 to be consistent with Summitt s second amended return . Neither of the second amended return was accepted by the IRS .

On March 15, 2007, respondent issued a notice of deficiency to petitioners for 2002 which disallowed a $1,767 flo -through loss from Summitt's foreign currency , option transacti 12 - disclosed on the first amended return .' On June 12, 2007, petitioners mailed a petition to this Court .". In their petition, petitioners disavowed portions of their first amended return and asserted that their share of the $9,975,000 premium Summit t received for the sale of the DKK call option (3034) option was not includable in 2002 income . .

On February 9, 2009, respondent filed the motion for partial summary judgment seeking determinations (1) that the marked-to- market rules of section 1256 do not apply to the EUR call optio n )(3032), and (2) that Summitt .must include in income in 2002 the premium received upon the issuance of the DKK call option (3034) .because the assignment of the option to charity caused a novation . Petitioners filed an objection to the motion on March 19, 2009 . Respondent filed a reply on April 27, 2009, and a supplemental memorandum on May 20, 2009 . The Court held a hearing on the motion on June .10, 2009 . Posthearing memoranda were received from petitioner and respondent on August 7 and September 24, 2009, respectively .

7Petitioners executed a Form 872 , . Consent to Extend the Time .

to Assess Tax, extending . the time to assess for 2002 to Apr . 15, 2007.

8The Court received the petition on June 18, 2007, but the petition was postmarked and deemed filed on June 12, 2007 .

Discussio n I .

Procedur e Summary judgment is intended to expedite litigat on and avoid unnecessary and expensive trials . Fla . Peach Corp . v .

Commissioner , 90 T .C . 678, 681 (1988) . The Court may grant summary judgment when there is no genuine issue of material fac t and a decision may be rendered as a matter of law . Rule 121(b) ; Sundstrand Corp . v . Commissioner , 98 T .C . 518, 520 (1992), affd .

Commissioner , 85 T .C . 812, 821 (1985) ; Naftel v . Commissioner, 8 5 T .C . 527, 529 (1985) . The Court will view any factua 1 .,materia l and inferences in the light most favorable to the nonmovin g party .

Dahlstrom v . Commissioner , supra at 821 ; Naft l v .

Commissioner , supra at 529 .

After reviewing the record, we are satisfied th t there is no genuine issue of any material fact on the section 1256 issue and that a decision may be rendered as a matter . of l w .

Respondent's motion will be granted denying the purpc rted loss on assignment of the major'foreign currency call option to charity .

On the second issue with respect to purported gain o th e assignment of-the minor foreign currency call option, there are issues of material fact that require a trial, and respondent's motion will be denied .

II .

Background .

This is a case of first impression that requires interpretation of the term "foreign currency contract" as defined in section 1256 . The term first appeared in the Code in 1982, and, although the . Secretary-was granted authority in 1982 to issue regulations to determine what types of contracts were included or excluded by the term, no such regulations have been issued . Nor has the term been interpreted by the courts .

As we shall see, section 1256 applies to futures and options contracts that are traded on a qualified exchange . A qualified exchange means _a national securities exchange which is registered with the Securities and Exchange Commission, a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or any other exchange,, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of section 1256 . Sec . 1256(g)(7) .

Section 1256 also covers contracts that are not traded on a qualified exchange ; i .e ., foreign currency contracts that are negotiated with any one of a number of, .commercial banks which provide an informal market for such trading . The issue before u s is whether a major foreign currency call option, a non-exchange- traded contract, comes within the meaning of "foreign currency contract " so as to qualify for section 1256 treatmen t Petitioners argue that the plain meaning of the definition of "foreign currency contract" in section 1256 should be interprete d broadly to include a major foreign 'currency . option .

.esponden t argues that the plain meaning of that definition show d,be interpreted narrowly to include only a forward contract, not an option .

The issue arises in the context of what are some Imes know n as "major/minor" transactions . In the typical major/ minor transaction, the taxpayer assigns to a charity⁹ a maj r foreign currency call option that has a"potential loss . The harity also assumes the taxpayer's obligation under the offsettin mino r foreign currency call option that has a potential gai 1 .

Because the taxpayer takes the position that the majo r foreign currency call option assigned to the charity .s a section 1256 foreign currency contract, the taxpayer relies o section .1256(c) .and Greene v . United States , 79 F' .3d 1348 (2d Cir . 1996), to mark to market the major foreign currency call option when the option is assigned to the charity in order to recogni e a loss at that time .10 The taxpayer may argue that the loss i s 9A charity is an organization defined in sec . 17 (c)(2) contributions to which are deductible for income tax urposes as charitable contributions .

"Unlike the present case, Greene v . United State L, 79 F .3d 1348 (2d Cir . 1996), dealt with transfers of regulate future s (continued .

.

.

) characterized as ordinary if the transaction also qualifies as a section 988 transaction . " In contrast, because the taxpayer takes the position that the assumed minor foreign currency call option is not a section 1256 foreign currency contract, the taxpayer claims that the charity's assumption of the written minor obligation does not cause the taxpayer to recognize gain and that the taxpayer also does not recognize gain when the option either .expires or terminates .

III . Section 125 6 When,Congress enacted section 1256 as part of the Economic Recovery Tax Act of 1981 .(ERTA), Pub . L . 97-34, sec . 503(a), 95 Stat . 327, the section applied only to regulated futures contracts that required physical delivery of personal property .

The pertinent parts of section 1256 originally provided :

SEC . 1256 . REGULATED FUTURES CONTRACTS MARKED TO MARKET .

(a) General Rule .--For purposes of this subtitle-- (1) each regulated futures contract held by th e taxpayer at the close of the taxable year shall be treated as 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 the . taxable year) , io ( .

. . continued ) contracts to charity . Regulated futures contracts, as will be shown, are sec . 1256 contracts . Sec . 1256(b)(1), (g)(1) .

"See sec . 988(a) (1) (A) and sec . 1 .988-3(a), Income Tax Regs ., which override the characterization of capital losses specified in sec` . 1256 if sec . 988 also applies .

(2) proper adjustment shall be made in of any gain or loss subsequently realized fo loss taken into account by reason of paragr a he amount gain o r h (1) , (3) any gain or loss with respect to a regulate d futures contract shall be treated as-- (A) short-term capital gain or los extent of 40 percent of such gain or l o s, to the ss, an d (B) long-term capital,-gain or loss extent of 60 percent of such gain or l o to the ss .

.(b) Regulated Futures Contracts Defined .--F of this section, the term `regulated futures cont a contract--- r purposes ract' means (1) which requires delivery of person (as defined in section 1092(d)(1)) or inter property ; (2) with respect to which the amount be deposited and the amount which may be wi depends on a system of marking to market ; a (3) which is traded on or subject to of a domestic board of trade designated as market by the Commodity Futures Trading Com of any board of trade or exchange which the determines has rules adequate to carry out purposes of this section .

(c) Terminations .-,-The rules of paragraphs and (3) of subsection (a) shall also apply to th termination during the taxable year of the taxpa obligation with respect to a regulated futures c offsetting, by .taking or making delivery, or ot h For purposes of the preceding sentence, fair mar at the time of the termination .shall be taken. i n Stevie 'D . Conlon and' Vincent=. .M . Aquilino, 'in the Principles of Financial Derivatives : U .S . & Internat Taxation, par . A¹ .03 (2009) (citing Hull, Options, Fu - 1 8 Other Derivative Securities 3-5 (2d ed . 1993), define a futures contract as an agreement to deliver specified commodities or other property at a future date .at an agreed price . Futures contracts are standardized agreements, tradable on regulated exchanges . A key aspect of .regulated futures contracts is the margin requirement . In enacting section 1256, Congress concluded that the daily receipt of profits and the dail y 'payment of losses employed by commodity futures exchanges in the .

United States for determining margin requirements made it appropriate to compute gains and losses for tax purposes under a similar, albeit annual, marked-to-market system of accounting .

H . Rept . 97-201, at 157 (1981), 1981-2 C .B . 352, 475 . The marked-to-market rule was also applied to futures transactions occurring before December 31 of each year if taxpayers terminated the futures contract before that date . Sec . 1256(c) .

The Technical Corrections Act of 1982 (1982 act), Pub . L .

9.7-448, sec . 105(c)(5), 96 Stat . 2385, made four significant changes to section 1256 that are pertinent to this case . First, the 1982 act removed the requirement of physical delivery for futures contracts so that cash-settled futures contracts, newly authorized to trade on futures exchanges by the Commodity Futures Trading Commission, would also qualify for section 1256 treatment .

Id .

19 - Second, the 1982 act expanded the phrase "regulated futures contract" :by adding "Such term includes any foreign currency contract" at the end .of section 1256(b) .

Id .

As the House .Ways and Means Committee explained :

ery i s s, and is with any mprise an rd rom private ed to iffer from not cal l changes, anism for ,prior t o . .Prior to ERTA, taxpayers who used Trading in foreign currency for future=deli conducted through regulated futures contra c also conducted through-contracts negotiated one of a number of commercial banks which c in-formal market'for such trading (bank forw contracts) . Bank forward contracts differ regulated future contracts in that they are contracts In which the-parties remain entit performance from each other . They further regulated futures contracts in that they do for daily variation margin to reflect marke and in that the interbank market has no mec settlement terminating a taxpayer's positio the delivery date . ,both the futures exchanges and the interbank market to conduct short-term trading in foreign currency were subject to substantially comparable tax treatment for both types of contract . Although bank forward contracts differ from regulated futures co tracts, the volume of trading through forward contracts in foreign currency in the interbank market is substa tially greater than foreign currency trading on f tures exchanges, and prices are readily availabl Such contracts are . economically comparable to regulated futures contracts -in the same currencies and are used interchangeably with regulated futures contracts by traders .',, [H . Rept . 97=794°, at 23 (1982) .

] A forward contract is an agreement to deliver a spec'fied commodity or other property at a(cid:127)ftiture date at an a reed price .

Conlon & Aquilino, supra par . Al .02 [2] [a] [i] . Typic .lly, neithe r party to a forward contract makes a payment at the t .me th e contract is executed .

20 - Third, 1982 act sec . 1.05(c)(5) added subsection (g)(1), a definitional subsection, to flesh out general definitions in section 1256(b) . , The newly enacted section 1256(g)(1) defined a foreign currency contract to be a,contract :

(A) which requires delivery of a foreign currency which is a currency in which positions are also traded through regulated futures contracts, , (B) which is traded in the interbank market, an d (C) which is entered into at arm's length at a price determined by reference to the price in the interbank market .

The requirement of delivery of the foreign currency reflected th e fact that "the interbank market has no mechanism for settlemen t .terminating a taxpayer's position prior to the delivery date" .

H . Rept . 97-794, supra at 23 .

Fourth, 1982 act sec . 105(c)(5) granted the Secretar y authority to prescribe regulations to determine the types o f contracts that could be included in or excluded from th e definition of a foreign currency contract in section 1256(g)(2) :

(2) Regulations .--The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of paragraph (1), including regulations excluding from the application of paragraph (1) any contract .(or type of contract) if its application thereto would be inconsistent with such purposes .

As previously stated, no such regulations have ever been issued .

The Deficit Reduction Act of 1984 (DEFRA), Pub . L . 98-369 ,

[Emphasis added to highlight amendment . ] Second, DEFRA sec . 102 changed the term "regulated futures contract" to the more general term "section 1256 contract" and reorganized section 1256(b) to identify, in general terms , contracts qualifying as section 1256 contracts .

Third, DEFRA sec . 102(a)(2) and (3) extended se tion 1256 t o cover "any nonequity option", sec . 1256(b)(3), and "any deale r equity option", sec . 1256(b)(4), and added specific definitions for those terms in section 1256(g)(3) through (6) inclusive .

The . Consolidated Appropriations Act, 2001, Pub . L . 106-554, app . G, sec . 401(g), 114 Stat . 2763A-649 (2000), add d "any { dealer securities futures contract" and an option on such a contract as section 1256(b)(5) .

After reflecting all amendments, section 1256(b) now 22 - provides :

SEC . 1256(b) . Section 1256 Contract Defined .--For purposes of this section, the term "section 1256 contract" means--- (1) any regulated futures contract, (2) any foreign currency contract,' (3) any nonequity option , (4) any dealer equity option, an d (5) any dealer securities futures contract .

The term "section 1256 contract" shall not include any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract .

IV .

Petitioners ' Contention s Petitioners contend that under the plain meaning of section 1256 ( g)(2)(A), .as amended in 1984, major foreign currency options are foreign currency contracts subject to the marked - to-market rules of section 1256 .

To support their position they maintai n that section 1256(b)(2) refers t "any foreign currenc y contract" . Therefore, section 1256(g)(2)(A) should be construed broadly because "contract" is an inherently broad term, and an option, by definition, is a unilateral contract . 1 Restatement, Contracts 2d, sec . 25 (1981) . They argue there are no legally significant differences among futures, forwards, and options .

Second, petitioners note that no regulations have been issued by the Secretary since 1982 which would limit the 23 - definition of a foreign currency contract, and, in petitioners ' view, the application of section 1256 to, various typ e contracts has been expanded and broadened over time . Petitioner s reason that this constant expansion, coupled with the inherentl y broad original defining term "contract", suggests tha where a close call is to be made on this issue , the history f vor s including major foreign currency options within the m aping o f "foreign currency contract" .' Z Third, petitioners maintain that there are no ec nomicall y significant differences among foreign currency forwar s, futures , and options . As petitioners state in their postheari g memorandum :

All of these derivatives accomplish the sa e economic access to currency .risk . They reproduce the economic risks and rewards-of holding particular foreign currency over time . These derivatives only differ in their pricing, timing and payment structure, and thus, can be mo ified or transformed into one another by .enterin into other derivatives . For example, an option writer fearing a movement in the underlying security adverse to his position can purchase a future on that security to effectively offset his ri k, or he could write a contraindicated option as . Petitioners did here .

Fourth, petitioners contend, under the plain me4ning of,th e .statute, if the Court finds that (1 .) an option is a ontract ; (2 ) 12Neither party claims that the major foreign c u options in this case are nonequity options, dealer e options, listed options, dealer securities futures c options on such contracts pursuant to sec . 1256(b)(3) inclusive .

renc y uity ntracts, or through (5 ) 24 - the value of the option depends on the value of the euro ; (3) the euro is a major foreign currency traded on the interbank market ; and (4) the option was entered into at arm's length and .with a price coinciding with the interbank market price . for such options, section 1256(g)(2)(A) "compels the conclusion that all major foreign currency derivatives created on the informal interbank market [including the major currency options at issue in this case] should be marked to market" .

V .

Respondent's . Contention s Respondent contends that under the plain meaning of section 1256 a foreign currency option cannot be a foreign currency contract ; i .e ., a section 1256 contract . Respondent notes that, as originally enacted in 1982, section,1256(g)(1)(A) referred to a contract that required delivery of a foreign currency . The writer of a forward contract is required to deliver a foreign currency at a future date at an agreed price . On the other hand, respondent . points out that, at the time an option is signed, there is,no obligation to deliver . An obligation to deliver occurs only if the holder of the option exercises its right to require delivery at some future time after the option has been signed . The obligation to deliver may never occur if the option holder allows the option to lapse . Consequently, respondent argues that, because section 1256(g)(1)(A), as originally enacted, referred to a contract that required delivery of the 25 - foreign currency, the section, as so enacted, could b applied only to forward contracts, not to options .

Respondent also contends that the addition of th phrase "or the settlement of which 'depends upon the value of" in DEFRA was intended to deal with uncertainty as to whether cash= ettled forward contracts were included in the definition of oreign currency contracts . In respondent's view, the change was no t intended to expand the application of section 1256 to foreig n currency option contracts because-the limiting phrase "whic h requires delivery of" was left in the statute .' Respondent argues that foreign currency contracts-can-be physically settled or cash-settled, but they still must require settlement at expiration . In support of his position,' respondent d'rects .us t o the House Ways and Means Committee report explaining th e provisions of DEFRA, which states :

Because certain contracts may call for a cash settlement by reference to the value of the foreign currency rather than actual delivery of the currency, the bill provides that the delivery of a fo ei n currency re uirement is met where the contract provides for a settlement determined b reference to the value of the foreign currency . [H . Rept . 98-432 ( art 2), at 1646 (1984) ; emphasis added .

] VI .

The Court's Holding .on-Section 125 6 Each party claims that the plain meaning of section .1256(g) (2) (A) (i) supports his position . In Campbell Commissioner , 108 T .C . 54, 62-63 (1997), we set out the well- established and well-understood rules for construing provision of the Internal Revenue Code r 26 - In construing. * * * :[a provision of the Internal Revenue Code], our task is to give effect to the intent of Congress, and . we must begin with the statutory language, which is the most persuasive evidence of the statutory purpose . Inc .

United States v . American Trucking Associations, ,. 310 U .S . 534, 542-543 (1940) . Ordinarily, the plain United meaning of the statutory language is conclusive . States v . Ron Pair Enters . Inc . , 489 U .S . 235, 242 (1989) . Where a statute is silent or ambiguous, we may look to legislative history in an effort to ascertain congressional intent . Burlington N . R .R .-v . Oklahoma Tax Commn . , 481 U .S . 454, 461 (1987) ; Griswold v . United States , 59 F .3d 1571, 1575-1576 (11th Cir . 1995) . However, where a statute appears to be clear on its face, we require unequivocal evidence of legislative, purpose before-construing the statute so as to override the plain meaning of the words Huntsberry v . Commissioner , 83 T .C . 742, 747- used therein . 748 (1984) ; see Pallottini v . Commissioner , . 90 T .C . 498, 503 (1988), and cases there cited .

We will therefore begin with the statute . The plain meaning of the words used will control unless there is unequivocal evidence of legislative purpose to override such meaning .

For convenience, we again set out section 1256(g)(2)(A), which defines a foreign currency contract to be-a contract-- (i) which requires delivery of, or the settlement o f which depends on the value of, a-foreign currency which is a currency in which positions are also,traded through regulated futures contracts , (ii) which is traded in the interbank market, and (iii) which is entered into at-arm's length at a price determined by reference to the price in the interbank market .

.Petitioner views the legal distinction between a forward and an .option to be insignificant . . We disagree . A forward foreign currency contract is a bilateral contract between a seller and .a 71 27 - buyer that obligates the seller, at the . time of signing,-to .settle his obligation to,perform by either delivering the currency or making cash settlement .(cid:127) Conlon & Aquilin , supra par . Al . 02 [2] [a] [i] A ,foreign currency option l,s,a unilateral contract that does not require delivery or settlement unless and until . the option is exercised by the holder . n obligation to settle may never arise if the holder does not exercis its rights under the option . It is .clear that, . .as originally enacted in 1982, section 1256(g)(1) applied .only to forward .cont acts . The statute referred to a contract which requi=red deliver .of .the foreign currency, not to a contract' .in .which delivery was (left to the discretion of the holder .

It is also clear that the 1984 .amendment "or the settlement of which depends on the value of" was inserted to allow a cash- settled forward contract to come within the 'term "for ig n currency contract" . Foreign currency contracts can ; .b physically settled or cash-settled, but they still must :-require, . by their .terms at inception, settlement at expiration .,13. The s atute' s . .plain language is dispositive . There is noeevidence~'nthe legislative history that a literal reading of . the statute will defeat Congress' purpose in enacting it . .

. Campbellv :

Commissioner , supra at 62-63 .

28 - Petitioners argue, by negative inference, that if the Secretary had wished to identify a foreign currency option as a "contract (or type of contract)" to be "[excluded] from the application of subparagraph (A)" of section 1256(g)(2), the Secretary would have exercised the authority, expressly delegated by subparagraph (B), to prescribe regulations for that purpose .

We disagree . The Secretary has not issued regulations bringing a foreign currency option within the definition of a foreign currency contract . That determination is within the province of the Secretary, not within the province of this Court .,-Moreover, the statute, as we understand it, speaks for itself .

Petitioners' contention that an option is .a contract and that the addition by Congress of other option contracts to section 1256 over the years evidences an intent to include major foreign currency options also fails . Granted, an option is a contract and Congress has added other option contracts that qualify for section 1256 treatment. However, Congress' additions have been restricted to nonequityoptions, dealer equity options, and options on dealer securities futures, all of which are traded on a qualified board or exchange . Sec . 1256(b)(3)-(5), (g)(3)- (6) .

Interbank markets have not been designated as a qualified board or exchange . Sec . 1256(g)(7) . When Congress has specified the types of contracts that come within the definition of a section 1256 contract, exclusion of others from its operation may be inferred .14 There is no evidence of legislative in ent .to designate=foreign currency options'as°section,1256 Co tracts ., .

Petitioners also contend . that futures, forwards,'and option s "accomplish the same economic access to .currency risk and should be„treated the same way under the tax laws . . However , petitioners admit that futures, forwards, and options differ in their pricing, timing, and payment' structures . . It is precisely these economic and legal distinctions that give rise o `disparat e treatment under .the tax laws .

VII . Conclusion and Holding With respect to the first issue presented to u s respondent's motion for partial summary judgment, we old that under section 1256, the major foreign currency option assigned by Summitt to the charity is not a foreign currency contract a s defined in section 1256(b)(2) and (g)(2), and the marred- t market provisions of section 1256 do not apply to the transfer of the EUR call option (3032) to the charity . As a resu t, petitioners did not recognize .a loss in 2002 on the E R cal l option (3032) pursuant to section 1256 .

"The maxim, expressio unius est exclusio alteri u that to express or include one thing implies the excl other, or of the alternative, applies . Black's Law D 661 (9th ed . 2009) ; see United States v . Smith , 499 U (1991) ("' Where Congress explicitly enumerates certa i * * * additional exceptions are not to be implied, in of evidence of a contrary legislative intent .'") (quo v . Glover Constr . Co ., 446 U .S ., 608 ; .616-617 (1980)) .

meaning . . sion of the ctionary S . 160, 16 7 exceptions the absence ing Andrus The second issue raised by respondent's motion for partial summary judgment deals with the recognition of gain upon assignment of the minor foreign ; currency call option to-charity .

That issue cannot be dealt with-isolated from the facts involved in the transaction as a whole, .and therefore, respondent's motion on the second issue will be denied .

To reflect the foregoing, An appropriate order wil l be issued .

13. The amendment is similar to . that proposed by the Senate for cash-settlement of regulated futures contracts in 1982 . See S . Rept . 97-592, at 276 (1982), 1983-1 . C .B . 475, 485-486 .
17. F .3d 965 (7th Cir . 1994) ;' Zaentz v . Commissioner , 0 T .C . 753, 754 (1988) . The. moving party bears the burden of proving that there is no genuine issue of material fact . Dahlstrom v .
98. Stat . 494, made three significant changes pertinent to this case . First, DEFRA sec . 722(a)(2), 98 Stat . 972 ; amended section 1256(g)(1)(A) by adding the phrase "or the settlement of which depends on the value of" to .the definition of a foreign currenc y contract . The effect of this amendment is in dispute in this case . Section 1256(g)(2)(A), as changed by DEFRA sec . 102(a)(3 defined a foreign currency contract to be a contract- (i) which requires delivery of, or the settlement o f which depends on the value of , a foreign currency which is a currency in which positions are also traded through regulated futures contracts , (ii) which is traded in the interbank market, an d (iii) which is entered into at arm's length at a price determined by reference to the price in the interbank market .