- 20 - alternative choice” to exercise the option or to allow it to lapse. Id. at 895; see also Halle v. Commissioner, 83 F.3d 649, 654 (4th Cir. 1996), revg. and remanding Kingstowne L.P. v. Commissioner, T.C. Memo. 1994-630; Koch v. Commissioner, supra at 82. Thus, the clear distinction between an option and a contract of sale is that an option gives a person a right to purchase [or sell] at a fixed price within a limited period of time but imposes no obligation on the person to do so, whereas a contract of sale contains mutual and reciprocal obligations, the seller being obligated to sell and the purchaser being obligated to buy. [Koch v. Commissioner, supra at 82.] Option payments are not includable in income to the optionor until the option either has lapsed or has been exercised. Kitchin v. Commissioner, 353 F.2d 13, 15 (4th Cir. 1965), revg. T.C. Memo. 1963-332; Va. Iron Coal & Coke Co. v. Commissioner, 99 F.2d 919 (4th Cir. 1938), affg. 37 B.T.A. 195 (1938); Elrod v. Commissioner, supra at 1066-1067; Koch v. Commissioner, supra at 89. In Rev. Rul. 58-234, 1958-1 C.B. 279, 283-284, the Commissioner has reiterated these same principles: An optionor, by the mere granting of an option to sell (“put”), or buy (“call”), certain property, may not have parted with any physical or tangible assets; but, just as the optionee thereby acquires a right to sell, or buy, certain property at a fixed price during a specified future period or on or before a specified future date, so does the optionor become obligated to accept, or deliver, such property at that price, if the option is exercised. Since the optionor assumes such obligation, which may be burdensome and is continuing until the option is terminated, without exercise, or otherwise, there is no closed transaction nor ascertainable income or gain realized by an optionor upon mere receipt of a premium for granting such anPage: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Next
Last modified: May 25, 2011