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he purchased pursuant thereto, for subsequent gain or
loss purposes. * * *
See also Rev. Rul. 78-182, 1978-1 C.B. 265.
A contract is an option contract when it provides (A) the
option to buy or sell, (B) certain property, (C) at a stipulated
price, (D) on or before a specific future date or within a
specified time period, (E) for consideration. W. Union Tel. Co.
v. Brown, 253 U.S. 101, 110 (1920); Halle v. Commissioner, supra
at 654; Old Harbor Native Corp. v. Commissioner, 104 T.C. at 201;
Estate of Franklin v. Commissioner, supra at 762-763; Rev. Rul.
58-234, supra. To determine whether a contract constitutes an
option, courts look at the contractual language and the economic
substance of the agreement. Halle v. Commissioner, supra.
Petitioner’s prior approval purchase contracts exhibit the
following characteristics of an option for tax purposes: (1) The
prior approval purchase contracts satisfy the formal requirements
of option contracts; (2) the economic substance of the prior
approval purchase contracts indicates that the contracts are an
option; and (3) the rationale for granting open transaction
treatment to option premium applies to petitioner’s transactions.
1. Formal Requirements of the Option
Petitioner’s prior approval purchase contracts provide for
the optional delivery of mortgages by an originator. The
Sellers’ and Servicers’ Guide states: “Delivery under this
program is optional. However, unless the optional delivery
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