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Section 451(a) generally provides that “The amount of any
item of gross income shall be included in the gross income for
the taxable year in which received by the taxpayer, unless, under
the method of accounting used in computing taxable income, such
amount is to be properly accounted for as of a different period.”
Accrual method taxpayers normally recognize income when “all the
events have occurred which fix the right to receive” income and
the amount of income “can be determined with reasonable
accuracy.” Sec. 1.451-1(a), Income Tax Regs. However, as more
fully explained, infra, payments of option premiums are not
recognized when received, even when the recipient has a fixed
right to retain the payments, because the character of those
payments is uncertain until the option has been exercised or has
lapsed. E.g., Old Harbor Native Corp. v. Commissioner, 104 T.C.
191, 200 (1995). Because of the unique facts in this case, we
must examine the rules governing the tax treatment of option
premiums and the policy underlying those rules to decide whether
a prior approval purchase contract constitutes an option for
Federal income tax purposes.
“An option has historically required the following two
elements: (1) A continuing offer to do an act, or to forbear
from doing an act, which does not ripen into a contract until
accepted; and (2) an agreement to leave the offer open for a
specified or reasonable period of time.” Id. at 201 (citing
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