Federal Home Loan Mortgage Corporation - Page 17

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          represent approximately 1 percent (by value and number) of all              
          the contracts that petitioner entered into in the prior approval            
          program.  Petitioner was not necessarily informed of the precise            
          reason for the nondelivery; petitioner believes that the typical            
          reason for nondelivery was failure of the underlying mortgage to            
          have been consummated.                                                      
                                     Discussion                                       
               Petitioner argues that the 0.5-percent nonrefundable                   
          portions of the commitment fees that originators paid to enter              
          into prior approval purchase contracts constitute “put” option16            
          premiums, the tax treatment of which could not be determined                
          until originators either exercised the options or allowed them to           
          lapse.  Respondent disagrees, arguing that the 0.5-percent                  
          nonrefundable portions of the commitment fees are not option                
          premium because the prior approval purchase contracts are not               
          option contracts.  Respondent argues that petitioner had a fixed            
          right to the nonrefundable portion of the commitment fees when              
          the prior approval purchase contracts were executed and that                
          section 451 requires petitioner, as an accrual basis taxpayer, to           
          recognize the nonrefundable commitment fees in the year of                  
          receipt because its right to retain the commitment fees was fixed           
          and determined.                                                             

               16 A “put” option gives the option holder the right, but not           
          the obligation, to sell something at an agreed upon price or                
          pricing formula for a limited period of time.                               





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Last modified: May 25, 2011