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This $500 per share exercise price was equal to the price paid,
at that time, by other investors for the stock of CC Holdings.
This constitutes strong evidence that the options had no premium
value to be associated with them at the time of issuance. Thus,
any value that might attach to the options would be speculative
and would depend on the profits of petitioner and on appreciation
in the value of the underlying stock in subsequent years.
On its original tax returns for its 1990 taxable year, the
taxable year in which the options were issued, and for its 1991
through 1994 taxable years, petitioner did not treat the $26
million loan as having any OID associated with it. Similarly,
neither FNBB nor Bank of Boston treated the $26 million loan as
having any OID associated with it, and only a nominal $1,000
value was associated with the options by FNBB. This also
constitutes significant evidence that the options had no premium
value to be associated with them at the time of issuance.
Certainly, representatives of FNBB and Bank of Boston hoped
that the options, in subsequent years, would increase in value
and increase greatly the income their banks would receive in
connection with financing the LBO. That speculative future
value, however, does not establish that OID is associated with
the $26 million loan.
Petitioner relies on Monarch Cement Co. v. United States,
634 F.2d 484 (10th Cir. 1980), and the approach adopted therein
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