- 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.Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Next
Last modified: May 25, 2011