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approval purchase contracts were executed. However, the fixed
right to a payment does not determine the tax treatment of an
option premium. In Va. Iron Coal & Coke Co. v. Commissioner, 37
B.T.A. 195 (1938), affd. 99 F.2d 919 (4th Cir. 1938), the
taxpayer received payments for an option and had a fixed right to
retain them. The Court explained that these payments were
entitled to open transaction treatment, despite the taxpayer’s
right to retain the payments, because the taxpayer did not know
whether the funds would represent income or a return of capital
when they were received.
The uncertainty associated with the 0.5-percent
nonrefundable portion of the commitment fee is similar to the
uncertainty described by the Board of Tax Appeals in Va. Iron
Coal & Coke Co. v. Commissioner, supra. In that case (involving
a call option), the Court stated:
Had the option been exercised, they [the premium] would
have represented a return of capital, that is, a
recovery of a part of the basis for gain or loss which
the property had in the hands of the seller. In that
event they would not have been income and their return
as income when received would have been improper.
* * * But in case of termination of the option and
abandonment by the Texas Co. of its right to have the
payments applied as a part of the purchase price, it
would be apparent for the first time that the payments
represented clear gain to the petitioner. In that
case, since no property would be sold, there would be
no reason to reduce the basis of that retained.
Id. at 198. In the instant case, when an originator delivered a
mortgage, petitioner properly treated the nonrefundable portion
of the commitment fee as a reduction in the consideration that it
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