- 17 -
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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