                                              MARK D. AND JENNIFER L. SUMMITT, PETITIONERS v.
                                                   COMMISSIONER OF INTERNAL REVENUE,
                                                               RESPONDENT
                                                        Docket No. 13893–07.                       Filed May 20, 2010.

                                                  P–H is a 10-percent shareholder in S, an S corporation. On
                                               Sept. 23, 2002, S paid premiums to acquire two major foreign
                                               currency options from B and received premiums when it sold
                                               two written minor foreign currency options to B. The pur-
                                               chased major foreign currency options were a reciprocal put
                                               and call, exactly offsetting each other. The written minor for-
                                               eign currency options also were a reciprocal put and call,
                                               exactly offsetting each other. On Sept. 25, 2002, S assigned
                                               the major foreign currency call option and the minor foreign
                                               currency call option to a charity pursuant to an assignment
                                               agreement in which the charity was substituted for S with
                                               respect to all obligations under the minor foreign currency call
                                               option. R filed a motion for partial summary judgment
                                               seeking a determination (1) that S did not recognize loss
                                               under sec. 1256, I.R.C., upon its assignment of the major for-
                                               eign currency call option to charity, and (2) that S must recog-
                                               nize gain upon its assignment of the minor currency call
                                               option to charity. Ps contend (1) that the major foreign cur-
                                               rency call option assigned to the charity is a sec. 1256, I.R.C.,
                                               foreign currency contract so that loss, if any, on the assign-
                                               ment 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 cur-
                                               rency 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 cur-
                                               rency 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, fur-
                                               ther, 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.

                                      248




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                                      (248)                        SUMMITT v. COMMISSIONER                                            249


                                           John E. Rogers and Colin C. Laitner, for petitioners.
                                           John Comeau and Jeffrey Dorfman, for respondent.

                                                                                  OPINION

                                         HAINES, Judge: This case is before the Court on respond-
                                      ent’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. Summitt, Inc. (Summitt), an S corporation,
                                      recognized loss upon its assignment to charity of a major for-
                                      eign currency call option, and (2) whether Summitt was
                                      required to include in its income, upon its assignment to
                                      charity of a minor foreign currency call option, the premium
                                      it received as writer of that option.
                                         The following facts are based upon the parties’ pleadings,
                                      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 findings 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
                                      its 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 Mon-
                                      rovia, California, at the time the petition was filed.
                                         During 2002 Summitt engaged Multi National Strategies,
                                      LLC (Multi National), located in New York City, to provide
                                      advice with respect to foreign currency option transactions
                                      and to serve as depositary for funds needed for the trans-
                                      actions. On September 10, 2002, Summitt entered into agree-
                                      ments with Beckenham Trading Co., Inc. (Beckenham), with
                                      its principal place of business in Fort Lee, New Jersey, to
                                        1 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.




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                                      250                134 UNITED STATES TAX COURT REPORTS                                        (248)


                                      engage in cross-currency transactions. The agreements
                                      between Beckenham and Summitt recited that the trans-
                                      actions 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
                                      options 2 and to sell on behalf of Summitt two 180-day writ-
                                      ten minor foreign currency options. 3 On September 23, 2002,
                                      Summitt purchased from Beckenham two major currency
                                      options, each pegged to the U.S. dollar (USD) and the Euro-
                                      pean Union euro (EUR). The major 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 (3032) and 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 date of March 21,
                                      2003. 4
                                        The party obligated to perform if the holder exercises the
                                      option is the writer of the option. Beckenham was the writer
                                      of the major currency options and obligated itself to perform
                                      at the discretion of Summitt. As the purchaser and holder of
                                      the major currency call option, Summitt, by exercising the
                                      option, could require Beckenham to deliver the euro at a
                                      price of $0.9788 USD/EUR. As the purchaser and holder of the
                                      put option, 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
                                        2 A major foreign currency is a ‘‘currency in which positions are * * * traded through regu-

                                      lated 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 respect to which the amount required to be de-
                                      posited 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 cur-
                                      rencies include the U.S. dollar, British pound, Japanese yen, Swiss franc, and European Union
                                      euro.
                                        3 Minor currencies include the Danish krone.
                                        4 The numbers in parentheses are trade references used to identify the various option trans-

                                      actions.




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                                      (248)                        SUMMITT v. COMMISSIONER                                            251


                                      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 cur-
                                      rency options, Summitt wrote and sold to Beckenham two
                                      minor currency options, each pegged to the USD and the
                                      Danish krone (DKK). The 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, obli-
                                      gated 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 exer-
                                      cising 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 off-
                                      setting positions: (1) A loss in a purchased major option and
                                      a gain in a written minor option, and (2) a gain in a pur-
                                      chased major option and a loss in a written minor option. At
                                      any time, Summitt’s loss in the purchased major option that
                                      had declined in value might be more or less than Summitt’s
                                      gain in the offsetting written minor option that had appre-
                                      ciated in value. Similarly, Summitt’s gain in the remaining
                                      purchased major option might be more or less than
                                      Summitt’s loss in the remaining written minor option.
                                         The premiums Beckenham charged for the major currency
                                      options totaled $19,967,500, consisting of a $9,983,750 pre-
                                      mium for the EUR call option (3032) and a $9,983,750




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                                      252                134 UNITED STATES TAX COURT REPORTS                                      (248)


                                      premium for the EUR put option (3033). The premiums
                                      charged by Summitt 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 net premium paid by Summitt in respect
                                      of the two major and two minor 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 of 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) by 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 reported the following currency transactions on
                                      Statement 6 attached to the return:




                                        5 Total premiums of $19,967,500 charged for the two major currency options less total pre-

                                      miums received of $19,950,000 for the two minor currency options.
                                        6 Schedule A to the assignment agreement, corporate minutes, and correspondence all des-

                                      ignate Sept. 25, 2002, as the effective date.




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11:08 May 24, 2013
                                                                                                                                                                                   (248)




Jkt 372897
                                              Property                          Date                                                        Cost or other




PO 20009
                          Option             description         Trade        acquired        Trade      Date sold     Gross sale price1       basis 2           Gain/loss

                         EUR Call        EUR 357,580,711         3032          9/23/02        3040       312/12/02         $8,233,215        4 $9,992,500        ($1,759,285)
                         EUR Put         EUR 357,580,711         3033          9/23/02        3041        5 9/25/02        11,724,660          9,983,750           1,740,910
                         DKK Put        DKK 2,661,225,000        3035          9/23/02        3043        12/12/02          9,975,000         11,720,285          (1,745,285)




Frm 00006
                          ---             AUD 80,594,595          ---          11/6/02         ---         11/6/02            868,084            870,584              (2,500)
                          ---             AUD 80,594,595          ---          11/8/02         ---         11/8/02          1,332,625          1,329,514               3,111
                          ---             EUR 37,500,000          ---         12/11/02         ---        12/11/02            480,636            483,136              (2,500)
                          ---             EUR 37,500,000          ---         12/12/02         ---        12/12/02            583,748            580,998               2,750




Fmt 2847
                          ---             AUD 60,000,000          ---         12/26/02         ---        12/26/02            531,768            533,768              (2,000)
                          ---             AUD 60,000,000          ---         12/31/02         ---        12/31/02            308,539            306,689               1,850

                           Total                                                                                                                                   (1,762,949)




Sfmt 2847
                         1 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.
                         2 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.
                                                                                                                                                                                   SUMMITT v. COMMISSIONER




                         3 Note the mistake in dates on the first two trades listed. The first trade listed is option 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.
                         4 Note that the amount reported on the return is $9,992,500. The premium was $9,983,750, and the $8,750 difference is unexplained.
                         5 The date should be Dec. 12, 2002, per n.3 to above Statement 6.




V:\FILES\SUMMITT.134
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                                      254                   134 UNITED STATES TAX COURT REPORTS                                           (248)


                                      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 1120S for 2002 (first
                                      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 currency
                                      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              Date        sale        other
                                           Option      description   Trade   acquired   Trade    sold       price        basis        Gain/loss

                                           DKK      DKK
                                            call     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 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 reported 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, 2004, petitioners paid the tax, including
                                      interest, in the total amount of $67,432.
                                        On February 14, 2007, Summitt attempted to file a 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 a




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                                      (248)                        SUMMITT v. COMMISSIONER                                            255


                                      second amended return for 2002 to be consistent with
                                      Summitt’s second amended return. Neither of the second
                                      amended returns was accepted by the IRS.
                                         On March 15, 2007, respondent issued a notice of defi-
                                      ciency to petitioners for 2002 which disallowed a $1,767 flow-
                                      through loss from Summitt’s foreign currency option trans-
                                      actions disclosed on the first amended return. 7 On June 12,
                                      2007, petitioners mailed a petition to this Court. 8 In their
                                      petition, petitioners disavowed portions of their first
                                      amended return and asserted that their share of the
                                      $9,975,000 premium Summitt 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 par-
                                      tial summary judgment seeking determinations (1) that the
                                      marked-to-market rules of section 1256 do not apply to the
                                      EUR call option (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.

                                                                                Discussion
                                      I. Procedure
                                        Summary judgment is intended to expedite litigation 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 mate-
                                      rial fact 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. 17 F.3d 965 (7th Cir. 1994); Zaentz v.
                                      Commissioner, 90 T.C. 753, 754 (1988). The moving party
                                        7 Petitioners executed a Form 872, Consent to Extend the Time to Assess Tax, extending the

                                      time to assess for 2002 to Apr. 15, 2007.
                                        8 The Court received the petition on June 18, 2007, but the petition was postmarked and

                                      deemed filed on June 12, 2007.




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                                      256                134 UNITED STATES TAX COURT REPORTS                                      (248)


                                      bears the burden of proving that there is no genuine issue
                                      of material fact. Dahlstrom v. Commissioner, 85 T.C. 812,
                                      821 (1985); Naftel v. Commissioner, 85 T.C. 527, 529 (1985).
                                      The Court will view any factual material and inferences in
                                      the light most favorable to the nonmoving party. Dahlstrom
                                      v. Commissioner, supra at 821; Naftel v. Commissioner,
                                      supra at 529.
                                        After reviewing the record, we are satisfied that 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 law.
                                      Respondent’s motion will be granted denying the purported
                                      loss on assignment of the major foreign currency call option
                                      to charity. On the second issue with respect to purported
                                      gain on the 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 interpreta-
                                      tion of the term ‘‘foreign currency contract’’ as defined in sec-
                                      tion 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 reg-
                                      istered 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 Sec-
                                      retary determines has rules adequate to carry out the pur-
                                      poses 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 us 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




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                                      (248)                        SUMMITT v. COMMISSIONER                                            257


                                      treatment. Petitioners argue that the plain meaning of the
                                      definition of ‘‘foreign currency contract’’ in section 1256
                                      should be interpreted broadly to include a major foreign cur-
                                      rency option. Respondent argues that the plain meaning of
                                      that definition should be interpreted narrowly to include only
                                      a forward contract, not an option.
                                         The issue arises in the context of what are sometimes
                                      known as ‘‘major/minor’’ transactions. In the typical major/
                                      minor transaction, the taxpayer assigns to a charity 9 a major
                                      foreign currency call option that has a potential loss. The
                                      charity also assumes the taxpayer’s obligation under the off-
                                      setting minor foreign currency call option that has a poten-
                                      tial gain.
                                         Because the taxpayer takes the position that the major for-
                                      eign currency call option assigned to the charity is a section
                                      1256 foreign currency contract, the taxpayer relies on sec-
                                      tion 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
                                      recognize a loss at that time. 10 The taxpayer may argue that
                                      the loss is characterized as ordinary if the transaction also
                                      qualifies as a section 988 transaction. 11
                                         In contrast, because the taxpayer takes the position that
                                      the assumed minor foreign currency call option is not a sec-
                                      tion 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 tax-
                                      payer also does not recognize gain when the option either
                                      expires or terminates.
                                      III. Section 1256
                                        When Congress enacted section 1256 as part of the Eco-
                                      nomic 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
                                         9 A charity is an organization defined in sec. 170(c)(2) contributions to which are deductible

                                      for income tax purposes as charitable contributions.
                                         10 Unlike the present case, Greene v. United States, 79 F.3d 1348 (2d Cir. 1996), dealt with

                                      transfers of regulated futures contracts to charity. Regulated futures contracts, as will be shown,
                                      are sec. 1256 contracts. Sec. 1256(b)(1), (g)(1).
                                         11 See sec. 988(a)(1)(A) and sec. 1.988–3(a), Income Tax Regs., which override the characteriza-

                                      tion of capital losses specified in sec. 1256 if sec. 988 also applies.




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                                      258                134 UNITED STATES TAX COURT REPORTS                                      (248)


                                      property. The pertinent parts of section 1256 originally pro-
                                      vided:
                                      SEC. 1256. REGULATED FUTURES CONTRACTS MARKED TO
                                                 MARKET.

                                           (a) GENERAL RULE.—For purposes of this subtitle—
                                             (1) each regulated futures contract held by the 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),
                                             (2) proper adjustment shall be made in the amount of any gain or loss
                                           subsequently realized for gain or loss taken into account by reason of
                                           paragraph (1),
                                             (3) any gain or loss with respect to a regulated futures contract shall
                                           be treated as—
                                                (A) short-term capital gain or loss, to the extent of 40 percent of
                                             such gain or loss, and
                                                (B) long-term capital gain or loss, to the extent of 60 percent of such
                                             gain or loss.

                                                                *    *   *   *    *   *   *
                                         (b) REGULATED FUTURES CONTRACTS DEFINED.—For purposes of this sec-
                                      tion, the term ‘‘regulated futures contract’’ means a contract—
                                            (1) which requires delivery of personal property (as defined in section
                                         1092(d)(1)) or interest in such property;
                                            (2) with respect to which the amount required to be deposited and the
                                         amount which may be withdrawn depends on a system of marking to
                                         market; and
                                            (3) which is traded on or subject to the rules of a domestic board of
                                         trade designated as a contract market by the Commodity Futures
                                         Trading Commission or of any board of trade or exchange which the Sec-
                                         retary determines has rules adequate to carry out the purposes of this
                                         section.
                                         (c) TERMINATIONS.—The rules of paragraphs (1), (2), and (3) of sub-
                                      section (a) shall also apply to the termination during the taxable year of
                                      the taxpayer’s obligation with respect to a regulated futures contract by
                                      offsetting, by taking or making delivery, or otherwise. For purposes of the
                                      preceding sentence, fair market value at the time of the termination shall
                                      be taken into account.

                                        Stevie D. Conlon and Vincent M. Aquilino, in their treatise
                                      Principles of Financial Derivatives: U.S. & International Tax-
                                      ation, par. A1.03 (2009) (citing Hull, Options, Futures and
                                      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,




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                                      (248)                        SUMMITT v. COMMISSIONER                                            259


                                      tradable on regulated exchanges. A key aspect of regulated
                                      futures contracts is the margin requirement. In enacting sec-
                                      tion 1256, Congress concluded that the daily receipt of profits
                                      and the daily 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.
                                      97–448, 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 Com-
                                      modity Futures Trading Commission, would also qualify for
                                      section 1256 treatment. Id.
                                         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:
                                      Trading in foreign currency for future delivery is conducted through regu-
                                      lated futures contracts, and is also conducted through contracts negotiated
                                      with any one of a number of commercial banks which comprise an informal
                                      market for such trading (bank forward contracts). Bank forward contracts
                                      differ from regulated future contracts in that they are private contracts in
                                      which the parties remain entitled to performance from each other. They
                                      further differ from regulated futures contracts in that they do not call for
                                      daily variation margin to reflect market changes, and in that the inter-
                                      bank market has no mechanism for settlement terminating a taxpayer’s
                                      position prior to the delivery date. Prior to ERTA, taxpayers who used 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 contracts, the volume of trading through for-
                                      ward contracts in foreign currency in the interbank market is substantially
                                      greater than foreign currency trading on futures exchanges, and prices are
                                      readily available. 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).]




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                                      260                134 UNITED STATES TAX COURT REPORTS                                      (248)


                                      A forward contract is an agreement to deliver a specified
                                      commodity or other property at a future date at an agreed
                                      price. Conlon & Aquilino, supra par. A1.02[2][a][i]. Typically,
                                      neither party to a forward contract makes a payment at the
                                      time the contract is executed.
                                         Third, 1982 Act sec. 105(c)(5) added subsection (g)(1), a
                                      definitional subsection, to flesh out general definitions in sec-
                                      tion 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, and
                                        (C) which is entered into at arm’s length at a price determined by ref-
                                      erence to the price in the interbank market.

                                      The requirement of delivery of the foreign currency reflected
                                      the fact that ‘‘the interbank market has no mechanism for
                                      settlement 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 Secretary
                                      authority to prescribe regulations to determine the types of
                                      contracts that could be included in or excluded from the defi-
                                      nition 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 incon-
                                      sistent with such purposes.

                                      As previously stated, no such regulations have ever been
                                      issued.
                                         The Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98–369,
                                      98 Stat. 494, made three significant changes pertinent to this
                                      case. First, DEFRA sec. 722(a)(2), 98 Stat. 972, amended sec-
                                      tion 1256(g)(1)(A) by adding the phrase ‘‘or the settlement of
                                      which depends on the value of ’’ to the definition of a foreign
                                      currency 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 con-
                                      tract—




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                                      (248)                        SUMMITT v. COMMISSIONER                                            261


                                        (i) which requires delivery of, or the settlement of 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 ref-
                                      erence to the price in the interbank market.
                                        [Emphasis added to highlight amendment.]

                                         Second, DEFRA sec. 102 changed the term ‘‘regulated
                                      futures contract’’ to the more general term ‘‘section 1256 con-
                                      tract’’ 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 section 1256
                                      to cover ‘‘any nonequity option’’, sec. 1256(b)(3), and ‘‘any
                                      dealer 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), added
                                      ‘‘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 pro-
                                      vides:
                                        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, and
                                           (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’ Contentions
                                         Petitioners contend that under the plain meaning of sec-
                                      tion 1256(g)(2)(A), as amended in 1984, major foreign cur-
                                      rency options are foreign currency contracts subject to the
                                      marked-to-market rules of section 1256. To support their
                                      position they maintain that section 1256(b)(2) refers to ‘‘any
                                      foreign currency contract’’. Therefore, section 1256(g)(2)(A)
                                      should be construed broadly because ‘‘contract’’ is an inher-
                                      ently broad term, and an option, by definition, is a unilateral
                                      contract. 1 Restatement, Contracts 2d, sec. 25 (1981). They




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                                      262                134 UNITED STATES TAX COURT REPORTS                                        (248)


                                      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
                                      definition of a foreign currency contract, and, in petitioners’
                                      view, the application of section 1256 to various types of con-
                                      tracts has been expanded and broadened over time. Peti-
                                      tioners reason that this constant expansion, coupled with the
                                      inherently broad original defining term ‘‘contract’’, suggests
                                      that where a close call is to be made on this issue, the his-
                                      tory favors including major foreign currency options within
                                      the meaning of ‘‘foreign currency contract’’. 12
                                         Third, petitioners maintain that there are no economically
                                      significant differences among foreign currency forwards,
                                      futures, and options. As petitioners state in their posthearing
                                      memorandum:
                                      All of these derivatives accomplish the same economic access to currency
                                      risk. They reproduce the economic risks and rewards of holding a par-
                                      ticular foreign currency over time. These derivatives only differ in their
                                      pricing, timing and payment structure, and thus, can be modified or trans-
                                      formed into one another by entering 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
                                      risk, or he could write a contraindicated option as Petitioners did here.

                                        Fourth, petitioners contend, under the plain meaning of
                                      the statute, if the Court finds that (1) an option is a contract;
                                      (2) the value of the option depends on the value of the euro;
                                      (3) the euro is a major foreign currency traded on the inter-
                                      bank 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 cur-
                                      rency options at issue in this case] should be marked to
                                      market’’.
                                      V. Respondent’s Contentions
                                         Respondent contends that under the plain meaning of sec-
                                      tion 1256 a foreign currency option cannot be a foreign cur-
                                         12 Neither party claims that the major foreign currency options in this case are nonequity op-

                                      tions, dealer equity options, listed options, dealer securities futures contracts, or options on such
                                      contracts pursuant to sec. 1256(b)(3) through (5) inclusive.




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                                      (248)                        SUMMITT v. COMMISSIONER                                            263


                                      rency 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 cur-
                                      rency. 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 foreign currency, the section, as so enacted,
                                      could be applied only to forward contracts, not to options.
                                         Respondent also contends that the addition of the phrase
                                      ‘‘or the settlement of which depends upon the value of ’’ in
                                      DEFRA was intended to deal with uncertainty as to whether
                                      cash-settled forward contracts were included in the definition
                                      of foreign currency contracts. In respondent’s view, the
                                      change was not intended to expand the application of section
                                      1256 to foreign currency option contracts because the lim-
                                      iting phrase ‘‘which 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 directs us to the House Ways and Means Com-
                                      mittee report explaining the 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 cur-
                                      rency, the bill provides that the delivery of a foreign currency requirement
                                      is met where the contract provides for a settlement determined by reference
                                      to the value of the foreign currency. [H. Rept. 98–432 (Part 2), at 1646
                                      (1984); emphasis added.]

                                      VI. The Court’s Holding on Section 1256
                                        Each party claims that the plain meaning of section
                                      1256(g)(2)(A)(i) supports his position. In Campbell v.
                                      Commissioner, 108 T.C. 54, 62–63 (1997), we set out the
                                      well-established and well-understood rules for construing a
                                      provision of the Internal Revenue Code:




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                                      264                134 UNITED STATES TAX COURT REPORTS                                      (248)


                                         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. United States v. American Trucking Associations, Inc., 310 U.S.
                                      534, 542–543 (1940). Ordinarily, the plain meaning of the statutory lan-
                                      guage is conclusive. United States v. Ron Pair Enters. Inc., 489 U.S. 235,
                                      242 (1989). Where a statute is silent or ambiguous, we may look to legisla-
                                      tive 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 used therein. Huntsberry v. Commissioner, 83
                                      T.C. 742, 747–748 (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 evi-
                                      dence 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 of 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 ref-
                                      erence 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 for-
                                      eign currency contract is a bilateral contract between a seller
                                      and a 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. Conlon & Aquilino,
                                      supra par. A1.02[2][a][i]. A foreign currency option is a uni-
                                      lateral contract that does not require delivery or settlement
                                      unless and until the option is exercised by the holder. An
                                      obligation to settle may never arise if the holder does not
                                      exercise its rights under the option. It is clear that, as origi-
                                      nally enacted in 1982, section 1256(g)(1) applied only to for-
                                      ward contracts. The statute referred to a contract which
                                      required delivery 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 settle-
                                      ment of which depends on the value of ’’ was inserted to allow




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                                      (248)                        SUMMITT v. COMMISSIONER                                            265


                                      a cash-settled forward contract to come within the term ‘‘for-
                                      eign currency contract’’. Foreign currency contracts can be
                                      physically settled or cash-settled, but they still must require,
                                      by their terms at inception, settlement at expiration. 13 The
                                      statute’s plain language is dispositive. There is no evidence
                                      in the legislative history that a literal reading of the statute
                                      will defeat Congress’ purpose in enacting it. Campbell v.
                                      Commissioner, supra at 62–63.
                                         Petitioners argue, by negative inference, that if the Sec-
                                      retary 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 dele-
                                      gated by subparagraph (B), to prescribe regulations for that
                                      purpose. We disagree. The Secretary has not issued regula-
                                      tions 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 nonequity options, 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 evi-
                                        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.
                                        14 The maxim expressio unius est exclusio alterius, meaning that to express or include one

                                      thing implies the exclusion of the other, or of the alternative, applies. Black’s Law Dictionary
                                      661 (9th ed. 2009); see United States v. Smith, 499 U.S. 160, 167 (1991) (‘‘ ‘Where Congress ex-
                                      plicitly enumerates certain exceptions * * * additional exceptions are not to be implied, in the
                                      absence of evidence of a contrary legislative intent.’ ’’ (quoting Andrus v. Glover Constr. Co., 446
                                      U.S. 608, 616–617 (1980))).




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                                      266                134 UNITED STATES TAX COURT REPORTS                                      (248)


                                      dence of legislative intent to designate foreign currency
                                      options as section 1256 contracts.
                                         Petitioners also contend that futures, forwards, and options
                                      ‘‘accomplish the same economic access to currency risk’’ and
                                      should be treated the same way under the tax laws. How-
                                      ever, 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
                                      to disparate treatment under the tax laws.
                                      VII. Conclusion and Holding
                                        With respect to the first issue presented to us by respond-
                                      ent’s motion for partial summary judgment, we hold that
                                      under section 1256, the major foreign currency option
                                      assigned by Summitt to the charity is not a foreign currency
                                      contract as defined in section 1256(b)(2) and (g)(2), and the
                                      marked-to-market provisions of section 1256 do not apply to
                                      the transfer of the EUR call option (3032) to the charity. As
                                      a result, petitioners did not recognize a loss in 2002 on the
                                      EUR call option (3032) pursuant to section 1256.
                                        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 will be issued.

                                                                               f




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