248

MARK D. AND JENNIFER L. SUMMITT, PETITIONERS v. 

COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 13893–07. Filed May 20, 2010. 

P–H is a 10-percent shareholder in S, an S corporation. On 

Sept. 23, 2002, S paid premiums to acquire two major foreign 

currency options from B and received premiums when it sold 

two written minor foreign currency options to B. The purchased major foreign currency options were a reciprocal put 

and call, exactly offsetting each other. The written minor foreign currency options also were a reciprocal put and call, 

exactly offsetting each other. On Sept. 25, 2002, S assigned 

the major foreign currency call option and the minor foreign 

currency call option to a charity pursuant to an assignment 

agreement in which the charity was substituted for S with 

respect to all obligations under the minor foreign currency call 

option. R filed a motion for partial summary judgment 

seeking a determination (1) that S did not recognize loss 

under sec. 1256, I.R.C., upon its assignment of the major foreign currency call option to charity, and (2) that S must recognize gain upon its assignment of the minor currency call 

option to charity. Ps contend (1) that the major foreign currency call option assigned to the charity is a sec. 1256, I.R.C., 

foreign currency contract so that loss, if any, on the assignment of that option was recognized by S in 2002 under the 

marked-to-market rules of sec. 1256(a) and (c), I.R.C., and (2) 

that gain, if any, on the assignment of the minor foreign currency call option to the charity was not recognized by S 

because the minor foreign currency option was not a sec. 

1256, I.R.C., contract and the assignment by S to the charity 

did not terminate the option. Held: Under sec. 1256, I.R.C., 

the major foreign currency call option is not a foreign currency contract as defined in sec. 1256(b)(2) and (g)(2), I.R.C., 

and the marked-to-market provisions of sec. 1256, I.R.C., do 

not apply to enable S to recognize the loss on the assignment 

of the major foreign currency option to the charity. Held, further, there are genuine issues of material fact remaining with 

respect to the income tax treatment of the assignment of the 

minor foreign currency call option to the charity that require 

trial. 

(248) SUMMITT v. COMMISSIONER 249

1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code), 

as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure. 

Amounts are rounded to the nearest dollar. 

John E. Rogers and Colin C. Laitner, for petitioners. 

John Comeau and Jeffrey Dorfman, for respondent. 

OPINION 

HAINES, Judge: This case is before the Court on respondent’s motion for partial summary judgment pursuant to Rule 

121. 1 Respondent raises two issues for decision in his 

motion: (1) Whether under the marked-to-market rules of 

section 1256 J. Summitt, Inc. (Summitt), an S corporation, 

recognized loss upon its assignment to charity of a major foreign currency call option, and (2) whether Summitt was 

required to include in its income, upon its assignment to 

charity of a minor foreign currency call option, the premium 

it received as writer of that option. 

The following facts are based upon the parties’ pleadings, 

affidavits, and exhibits in support of and in opposition to the 

motion for partial summary judgment. They are stated solely 

for the purpose of deciding the motion and not as findings of 

fact in this case. See Fed. R. Civ. P. 52(a). 

Background

The loss petitioners claim came from Summitt’s offsetting 

foreign currency option transactions, the income tax effects of 

which flowed through to petitioners’ joint 2002 Federal 

income tax return. Summitt is a California corporation with 

its principal place of business in San Clemente. Summitt was 

incorporated on March 25, 1996, and elected on April 1, 

1997, to be treated as an S corporation under section 

1361(a)(1). Petitioner Mark D. Summitt (petitioner) is a 10-

percent shareholder in Summitt. Petitioners resided in Monrovia, California, at the time the petition was filed. 

During 2002 Summitt engaged Multi National Strategies, 

LLC (Multi National), located in New York City, to provide 

advice with respect to foreign currency option transactions 

and to serve as depositary for funds needed for the transactions. On September 10, 2002, Summitt entered into agreements with Beckenham Trading Co., Inc. (Beckenham), with 

its principal place of business in Fort Lee, New Jersey, to 

250 134 UNITED STATES TAX COURT REPORTS (248) 

2 A major foreign currency is a ‘‘currency in which positions are * * * traded through regulated futures contracts’’. Sec. 1256(g)(2)(A)(i). The term ‘‘regulated futures contract’’, as defined 

in sec. 1256(g)(1), means ‘‘a contract—(A) with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, 

and (B) which is traded on or subject to the rules of a qualified board or exchange.’’ Major currencies include the U.S. dollar, British pound, Japanese yen, Swiss franc, and European Union 

euro. 

3Minor currencies include the Danish krone. 

4The numbers in parentheses are trade references used to identify the various option transactions. 

engage in cross-currency transactions. The agreements 

between Beckenham and Summitt recited that the transactions were intended to be exempt from, and otherwise not 

subject to, regulation under the Commodity Exchange Act. 

Beckenham was designated the calculation agent for the 

transactions to determine all amounts due to or from each 

party in accordance with terms specified in the agreements 

with Summitt. 

On September 21, 2002, Summitt authorized Multi 

National to purchase two 180-day major foreign currency 

options 2 and to sell on behalf of Summitt two 180-day written minor foreign currency options. 3 On September 23, 2002, 

Summitt purchased from Beckenham two major currency 

options, each pegged to the U.S. dollar (USD) and the European Union euro (EUR). The major currency options were a 

reciprocal put and call, exactly offsetting each other. The 

purchased major options moved inversely in value to one 

another over the 180-day period, thus ensuring that Summitt 

would hold a loss position in one of the two purchased 

options. The EUR call option (3032) and the EUR put option 

(3033) had a notional value of EUR 357,580,711, a strike price 

of $0.9788 USD/EUR, and an expiration date of March 21, 

2003. 4

The party obligated to perform if the holder exercises the 

option is the writer of the option. Beckenham was the writer 

of the major currency options and obligated itself to perform 

at the discretion of Summitt. As the purchaser and holder of 

the major currency call option, Summitt, by exercising the 

option, could require Beckenham to deliver the euro at a 

price of $0.9788 USD/EUR. As the purchaser and holder of the 

put option, Summitt, by exercising the option, could require 

Beckenham to take delivery of the euro at a future date or 

dates at a price of $0.9788 USD/EUR. The price specified in 

(248) SUMMITT v. COMMISSIONER 251

the contract at which the euro would be purchased pursuant 

to exercise of the put or call option is the strike price. 

On the same day that Summitt purchased the major currency options, Summitt wrote and sold to Beckenham two 

minor currency options, each pegged to the USD and the 

Danish krone (DKK). The written minor currency options 

were a reciprocal put and call, exactly offsetting each other. 

The written minor options moved inversely in value to one 

another over the 180-day period, thus ensuring that Summitt 

would hold a gain position in one of the two minor currency 

options. The DKK call option (3034) and the DKK put option 

(3035) had a notional value of DKK 2,661,225,000 with a 

strike price of 7.6035 DKK/USD and a bonus payout of DKK

10,162,040 if the DKK/USD strike price was greater than 

7.2586 DKK. The expiration date for both minor currency 

options was March 21, 2003. 

Summitt, the writer of the minor currency options, obligated itself to perform at the discretion of Beckenham. As 

the purchaser and holder of the minor currency call option, 

Beckenham, by exercising the option, could require Summitt 

to deliver Danish kroner at a price of 7.6035 DKK/USD. As the 

purchaser and holder of the put option, Beckenham, by exercising the option, could require Summitt to take delivery of 

kroner at a future date or dates at a price of 7.6035 DKK/USD. 

The values of the two foreign currencies underlying the 

purchased major and written minor options historically have 

demonstrated a very high positive correlation with each 

other. As the currencies change in value because of exchange 

rate fluctuations, Summitt could reasonably expect to have 

the following potential gains and losses in substantially offsetting positions: (1) A loss in a purchased major option and 

a gain in a written minor option, and (2) a gain in a purchased major option and a loss in a written minor option. At 

any time, Summitt’s loss in the purchased major option that 

had declined in value might be more or less than Summitt’s 

gain in the offsetting written minor option that had appreciated in value. Similarly, Summitt’s gain in the remaining 

purchased major option might be more or less than 

Summitt’s loss in the remaining written minor option. 

The premiums Beckenham charged for the major currency 

options totaled $19,967,500, consisting of a $9,983,750 premium for the EUR call option (3032) and a $9,983,750

252 134 UNITED STATES TAX COURT REPORTS (248) 

5Total premiums of $19,967,500 charged for the two major currency options less total premiums received of $19,950,000 for the two minor currency options. 

6Schedule A to the assignment agreement, corporate minutes, and correspondence all designate Sept. 25, 2002, as the effective date. 

premium for the EUR put option (3033). The premiums 

charged by Summitt for the minor currency options totaled 

$19,950,000, consisting of a $9,975,000 premium for the DKK

call option (3034) and a $9,975,000 premium for the DKK put 

option (3035). The net premium paid by Summitt in respect 

of the two major and two minor options was $17,500. 5

Two days later, on September 25, 2002, Summitt assigned 

to the Foundation for Educated America, Inc. (charity), the 

EUR call option (3032) and the DKK call option (3034). 6 At the 

time of the assignment, the potential loss on the EUR call 

option (3032) was $1,750,535, and the potential gain on the 

DKK call option (3034) was $1,745,285. On December 12, 

2002, Summitt closed out the EUR put option (3033) and the 

DKK put option (3035) by agreeing with Beckenham to offset 

those options against each other. 

In 2003 Summitt filed a Form 1120S, U.S. Income Tax 

Return for an S Corporation, for 2002 (original return) 

reporting gross receipts of $21,258,592 less $18,739,492 cost 

of goods sold, resulting in a gross profit of $2,519,100. 

Summitt also reported the following currency transactions on 

Statement 6 attached to the return:

(248) SUMMITT v. COMMISSIONER 253 Option Property description Trade Date acquired Trade Date sold Gross sale price1 Cost or other basis 2 Gain/loss EUR Call EUR 357,580,711 3032 9/23/02 3040 312/12/02 $8,233,215 4 $9,992,500 ($1,759,285) EUR Put EUR 357,580,711 3033 9/23/02 3041 5 9/25/02 11,724,660 9,983,750 1,740,910 DKK Put DKK 2,661,225,000 3035 9/23/02 3043 12/12/02 9,975,000 11,720,285 (1,745,285) - - - AUD 80,594,595 - - - 11/6/02 - - - 11/6/02 868,084 870,584 (2,500) - - - AUD 80,594,595 - - - 11/8/02 - - - 11/8/02 1,332,625 1,329,514 3,111 - - - EUR 37,500,000 - - - 12/11/02 - - - 12/11/02 480,636 483,136 (2,500) - - - EUR 37,500,000 - - - 12/12/02 - - - 12/12/02 583,748 580,998 2,750 - - - AUD 60,000,000 - - - 12/26/02 - - - 12/26/02 531,768 533,768 (2,000) - - - AUD 60,000,000 - - - 12/31/02 - - - 12/31/02 308,539 306,689 1,850 Total (1,762,949)

1The gross sale price for each minor option was the premium paid by Beckenham to Summitt, writer of the options. The gross sale price for each 

major option was determined by Beckenham. 2The cost or other basis for each major option was the premium paid by Summitt to Beckenham. The cost for each minor option was determined by Beckenham. 3 Note the mistake in dates on the first two trades listed. The first trade listed is option 3032, and the second is option 3033. The return transposes 

the dates transferred/closed: 3032 was transferred on Sept. 25, 2002, and 3033 was closed on Dec. 12, 2002. 4 Note that the amount reported on the return is $9,992,500. The premium was $9,983,750, and the $8,750 difference is unexplained. 5The date should be Dec. 12, 2002, per n.3 to above Statement 6. 

254 134 UNITED STATES TAX COURT REPORTS (248) 

Summitt did not report gain from the disposition of the DKK

call option (3034) on its original return. The $1,762,949 loss 

from Statement 6 was subtracted from gross profit of 

$2,519,100 to arrive at total income of $756,151. Business 

deductions of $691,424 were claimed, resulting in ordinary 

income of $64,727. As a 10-percent shareholder of Summitt, 

petitioner reported $6,473 ordinary income from Summitt on 

his timely filed joint Form 1040, U.S. Individual Income Tax 

Return, for 2002. 

Summitt filed a first amended Form 1120S for 2002 (first 

amended return) on January 8, 2004, reporting the same 

gross receipts, cost of goods sold, and gross profit shown on 

the original return. However, Summitt amended the currency 

transactions reported on Statement 6 attached to the return 

by adding the following entry to report the gain on the DKK

call option (3034):

Option

Property

description Trade

Date

acquired Trade

Date

sold

Gross

sale

price

Cost or

other

basis Gain/loss

DKK DKK 

call 2,661,225,000 3034 9/23/02 3042 9/25/02 $9,975,000 $8,229,715 $1,745,285

By reporting the gain of $1,745,285 from the disposition of 

the DKK call option (3034), the $1,762,949 loss reported on 

the original return was reduced to $17,664 on the first 

amended return. As a result, rather than reducing gross 

profit of $2,519,100 by $1,762,949, gross profit was reduced 

by $17,664 on the first amended return resulting in total 

income of $2,501,436. Subtracting the claimed business 

deductions of $691,424, unchanged from the original return, 

resulted in reported ordinary income of $1,810,012. 

On January 9, 2004, petitioners filed a first amended 

return for 2002 on which they increased their flow-through 

income from Summitt to $181,001. Petitioners’ first amended 

return reported an additional tax due of $64,779. The 

Internal Revenue Service (IRS) assessed this additional tax 

and on April 5, 2004, petitioners paid the tax, including 

interest, in the total amount of $67,432. 

On February 14, 2007, Summitt attempted to file a second 

amended return for 2002, which reinstated its position that 

the receipt of a premium on the DKK call option (3034) was 

not taxable. The second amended return was a restatement 

of the original return. Petitioners also attempted to file a 

(248) SUMMITT v. COMMISSIONER 255

7Petitioners executed a Form 872, Consent to Extend the Time to Assess Tax, extending the 

time to assess for 2002 to Apr. 15, 2007. 

8The Court received the petition on June 18, 2007, but the petition was postmarked and 

deemed filed on June 12, 2007. 

second amended return for 2002 to be consistent with 

Summitt’s second amended return. Neither of the second 

amended returns was accepted by the IRS. 

On March 15, 2007, respondent issued a notice of deficiency to petitioners for 2002 which disallowed a $1,767 flowthrough loss from Summitt’s foreign currency option transactions disclosed on the first amended return. 7 On June 12, 

2007, petitioners mailed a petition to this Court. 8 In their 

petition, petitioners disavowed portions of their first 

amended return and asserted that their share of the 

$9,975,000 premium Summitt received for the sale of the 

DKK call option (3034) option was not includable in 2002 

income. 

On February 9, 2009, respondent filed the motion for partial summary judgment seeking determinations (1) that the 

marked-to-market rules of section 1256 do not apply to the 

EUR call option (3032), and (2) that Summitt must include in 

income in 2002 the premium received upon the issuance of 

the DKK call option (3034) because the assignment of the 

option to charity caused a novation. Petitioners filed an 

objection to the motion on March 19, 2009. Respondent filed 

a reply on April 27, 2009, and a supplemental memorandum 

on May 20, 2009. The Court held a hearing on the motion on 

June 10, 2009. Posthearing memoranda were received from 

petitioner and respondent on August 7 and September 24, 

2009, respectively. 

Discussion

I. Procedure

Summary judgment is intended to expedite litigation and 

avoid unnecessary and expensive trials. Fla. Peach Corp. v. 

Commissioner, 90 T.C. 678, 681 (1988). The Court may grant 

summary judgment when there is no genuine issue of material fact and a decision may be rendered as a matter of law. 

Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 

520 (1992), affd. 17 F.3d 965 (7th Cir. 1994); Zaentz v. 

Commissioner, 90 T.C. 753, 754 (1988). The moving party 

256 134 UNITED STATES TAX COURT REPORTS (248) 

bears the burden of proving that there is no genuine issue 

of material fact. Dahlstrom v. Commissioner, 85 T.C. 812, 

821 (1985); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). 

The Court will view any factual material and inferences in 

the light most favorable to the nonmoving party. Dahlstrom 

v. Commissioner, supra at 821; Naftel v. Commissioner, 

supra at 529. 

After reviewing the record, we are satisfied that there is no 

genuine issue of any material fact on the section 1256 issue 

and that a decision may be rendered as a matter of law. 

Respondent’s motion will be granted denying the purported 

loss on assignment of the major foreign currency call option 

to charity. On the second issue with respect to purported 

gain on the assignment of the minor foreign currency call 

option, there are issues of material fact that require a trial, 

and respondent’s motion will be denied. 

II. Background

This is a case of first impression that requires interpretation of the term ‘‘foreign currency contract’’ as defined in section 1256. The term first appeared in the Code in 1982, and, 

although the Secretary was granted authority in 1982 to 

issue regulations to determine what types of contracts were 

included or excluded by the term, no such regulations have 

been issued. Nor has the term been interpreted by the courts. 

As we shall see, section 1256 applies to futures and options 

contracts that are traded on a qualified exchange. A qualified 

exchange means a national securities exchange which is registered with the Securities and Exchange Commission, a 

domestic board of trade designated as a contract market by 

the Commodity Futures Trading Commission, or any other 

exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of section 1256. Sec. 1256(g)(7). 

Section 1256 also covers contracts that are not traded on 

a qualified exchange; i.e., foreign currency contracts that are 

negotiated with any one of a number of commercial banks 

which provide an informal market for such trading. The issue 

before us is whether a major foreign currency call option, a 

non-exchange-traded contract, comes within the meaning of 

‘‘foreign currency contract’’ so as to qualify for section 1256 

(248) SUMMITT v. COMMISSIONER 257

9 A charity is an organization defined in sec. 170(c)(2) contributions to which are deductible 

for income tax purposes as charitable contributions. 

10 Unlike the present case, Greene v. United States, 79 F.3d 1348 (2d Cir. 1996), dealt with 

transfers of regulated futures contracts to charity. Regulated futures contracts, as will be shown, 

are sec. 1256 contracts. Sec. 1256(b)(1), (g)(1). 

11See sec. 988(a)(1)(A) and sec. 1.988–3(a), Income Tax Regs., which override the characterization of capital losses specified in sec. 1256 if sec. 988 also applies. 

treatment. Petitioners argue that the plain meaning of the 

definition of ‘‘foreign currency contract’’ in section 1256 

should be interpreted broadly to include a major foreign currency option. Respondent argues that the plain meaning of 

that definition should be interpreted narrowly to include only 

a forward contract, not an option. 

The issue arises in the context of what are sometimes 

known as ‘‘major/minor’’ transactions. In the typical major/

minor transaction, the taxpayer assigns to a charity 9 a major 

foreign currency call option that has a potential loss. The 

charity also assumes the taxpayer’s obligation under the offsetting minor foreign currency call option that has a potential gain. 

Because the taxpayer takes the position that the major foreign currency call option assigned to the charity is a section 

1256 foreign currency contract, the taxpayer relies on section 1256(c) and Greene v. United States, 79 F.3d 1348 (2d 

Cir. 1996), to mark to market the major foreign currency call 

option when the option is assigned to the charity in order to 

recognize a loss at that time. 10 The taxpayer may argue that 

the loss is characterized as ordinary if the transaction also 

qualifies as a section 988 transaction. 11

In contrast, because the taxpayer takes the position that 

the assumed minor foreign currency call option is not a section 1256 foreign currency contract, the taxpayer claims that 

the charity’s assumption of the written minor obligation does 

not cause the taxpayer to recognize gain and that the taxpayer also does not recognize gain when the option either 

expires or terminates. 

III. Section 1256

When Congress enacted section 1256 as part of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97–34, sec. 

503(a), 95 Stat. 327, the section applied only to regulated 

futures contracts that required physical delivery of personal 

258 134 UNITED STATES TAX COURT REPORTS (248) 

property. The pertinent parts of section 1256 originally provided: 

SEC. 1256. REGULATED FUTURES CONTRACTS MARKED TO 

MARKET. 

(a) GENERAL RULE.—For purposes of this subtitle—

(1) each regulated futures contract held by the taxpayer at the close 

of the taxable year shall be treated as sold for its fair market value on 

the last business day of such taxable year (and any gain or loss shall 

be taken into account for the taxable year), 

(2) proper adjustment shall be made in the amount of any gain or loss 

subsequently realized for gain or loss taken into account by reason of 

paragraph (1), 

(3) any gain or loss with respect to a regulated futures contract shall 

be treated as—

(A) short-term capital gain or loss, to the extent of 40 percent of 

such gain or loss, and 

(B) long-term capital gain or loss, to the extent of 60 percent of such 

gain or loss. 

* * * * * * *

(b) REGULATED FUTURES CONTRACTS DEFINED.—For purposes of this section, the term ‘‘regulated futures contract’’ means a contract—

(1) which requires delivery of personal property (as defined in section 

1092(d)(1)) or interest in such property; 

(2) with respect to which the amount required to be deposited and the 

amount which may be withdrawn depends on a system of marking to 

market; and 

(3) which is traded on or subject to the rules of a domestic board of 

trade designated as a contract market by the Commodity Futures 

Trading Commission or of any board of trade or exchange which the Secretary determines has rules adequate to carry out the purposes of this 

section. 

(c) TERMINATIONS.—The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination during the taxable year of 

the taxpayer’s obligation with respect to a regulated futures contract by 

offsetting, by taking or making delivery, or otherwise. For purposes of the 

preceding sentence, fair market value at the time of the termination shall 

be taken into account. 

Stevie D. Conlon and Vincent M. Aquilino, in their treatise 

Principles of Financial Derivatives: U.S. & International Taxation, par. A1.03 (2009) (citing Hull, Options, Futures and 

Other Derivative Securities 3–5 (2d ed. 1993)), define a 

futures contract as an agreement to deliver specified 

commodities or other property at a future date at an agreed 

price. Futures contracts are standardized agreements, 

(248) SUMMITT v. COMMISSIONER 259

tradable on regulated exchanges. A key aspect of regulated 

futures contracts is the margin requirement. In enacting section 1256, Congress concluded that the daily receipt of profits 

and the daily payment of losses employed by commodity 

futures exchanges in the United States for determining 

margin requirements made it appropriate to compute gains 

and losses for tax purposes under a similar, albeit annual, 

marked-to-market system of accounting. H. Rept. 97–201, at 

157 (1981), 1981–2 C.B. 352, 475. The marked-to-market rule 

was also applied to futures transactions occurring before 

December 31 of each year if taxpayers terminated the futures 

contract before that date. Sec. 1256(c). 

The Technical Corrections Act of 1982 (1982 Act), Pub. L. 

97–448, sec. 105(c)(5), 96 Stat. 2385, made four significant 

changes to section 1256 that are pertinent to this case. First, 

the 1982 Act removed the requirement of physical delivery 

for futures contracts so that cash-settled futures contracts, 

newly authorized to trade on futures exchanges by the Commodity Futures Trading Commission, would also qualify for 

section 1256 treatment. Id.

Second, the 1982 Act expanded the phrase ‘‘regulated 

futures contract’’ by adding ‘‘Such term includes any foreign 

currency contract’’ at the end of section 1256(b). Id. As the 

House Ways and Means Committee explained: 

Trading in foreign currency for future delivery is conducted through regulated futures contracts, and is also conducted through contracts negotiated 

with any one of a number of commercial banks which comprise an informal 

market for such trading (bank forward contracts). Bank forward contracts 

differ from regulated future contracts in that they are private contracts in 

which the parties remain entitled to performance from each other. They 

further differ from regulated futures contracts in that they do not call for 

daily variation margin to reflect market changes, and in that the interbank market has no mechanism for settlement terminating a taxpayer’s 

position prior to the delivery date. Prior to ERTA, taxpayers who used both 

the futures exchanges and the interbank market to conduct short-term 

trading in foreign currency were subject to substantially comparable tax 

treatment for both types of contract. Although bank forward contracts 

differ from regulated futures contracts, the volume of trading through forward contracts in foreign currency in the interbank market is substantially 

greater than foreign currency trading on futures exchanges, and prices are 

readily available. Such contracts are economically comparable to regulated 

futures contracts in the same currencies and are used interchangeably 

with regulated futures contracts by traders. [H. Rept. 97–794, at 23 

(1982).] 

260 134 UNITED STATES TAX COURT REPORTS (248) 

A forward contract is an agreement to deliver a specified 

commodity or other property at a future date at an agreed 

price. Conlon & Aquilino, supra par. A1.02[2][a][i]. Typically, 

neither party to a forward contract makes a payment at the 

time the contract is executed. 

Third, 1982 Act sec. 105(c)(5) added subsection (g)(1), a 

definitional subsection, to flesh out general definitions in section 1256(b). The newly enacted section 1256(g)(1) defined a 

foreign currency contract to be a contract: 

(A) which requires delivery of a foreign currency which is a currency in 

which positions are also traded through regulated futures contracts, 

(B) which is traded in the interbank market, and 

(C) which is entered into at arm’s length at a price determined by reference to the price in the interbank market. 

The requirement of delivery of the foreign currency reflected 

the fact that ‘‘the interbank market has no mechanism for 

settlement terminating a taxpayer’s position prior to the 

delivery date’’. H. Rept. 97–794, supra at 23. 

Fourth, 1982 Act sec. 105(c)(5) granted the Secretary 

authority to prescribe regulations to determine the types of 

contracts that could be included in or excluded from the definition of a foreign currency contract in section 1256(g)(2): 

(2) REGULATIONS.––The Secretary shall prescribe such regulations as 

may be necessary or appropriate to carry out the purposes of paragraph 

(1), including regulations excluding from the application of paragraph (1) 

any contract (or type of contract) if its application thereto would be inconsistent with such purposes. 

As previously stated, no such regulations have ever been 

issued. 

The Deficit Reduction Act of 1984 (DEFRA), Pub. L. 98–369, 

98 Stat. 494, made three significant changes pertinent to this 

case. First, DEFRA sec. 722(a)(2), 98 Stat. 972, amended section 1256(g)(1)(A) by adding the phrase ‘‘or the settlement of 

which depends on the value of ’’ to the definition of a foreign 

currency contract. The effect of this amendment is in dispute 

in this case. Section 1256(g)(2)(A), as changed by DEFRA sec. 

102(a)(3), defined a foreign currency contract to be a contract—

(248) SUMMITT v. COMMISSIONER 261

(i) which requires delivery of, or the settlement of which depends on the 

value of, a foreign currency which is a currency in which positions are also 

traded through regulated futures contracts, 

(ii) which is traded in the interbank market, and 

(iii) which is entered into at arm’s length at a price determined by reference to the price in the interbank market. 

[Emphasis added to highlight amendment.] 

Second, DEFRA sec. 102 changed the term ‘‘regulated 

futures contract’’ to the more general term ‘‘section 1256 contract’’ and reorganized section 1256(b) to identify, in general 

terms, contracts qualifying as section 1256 contracts. 

Third, DEFRA sec. 102(a)(2) and (3) extended section 1256 

to cover ‘‘any nonequity option’’, sec. 1256(b)(3), and ‘‘any 

dealer equity option’’, sec. 1256(b)(4), and added specific 

definitions for those terms in section 1256(g)(3) through (6) 

inclusive. 

The Consolidated Appropriations Act, 2001, Pub. L. 106–

554, app. G, sec. 401(g), 114 Stat. 2763A–649 (2000), added 

‘‘any dealer securities futures contract’’ and an option on 

such a contract as section 1256(b)(5). 

After reflecting all amendments, section 1256(b) now provides: 

SEC. 1256(b). SECTION 1256 CONTRACT DEFINED.—For purposes of this 

section, the term ‘‘section 1256 contract’’ means—

(1) any regulated futures contract, 

(2) any foreign currency contract, 

(3) any nonequity option, 

(4) any dealer equity option, and 

(5) any dealer securities futures contract.

The term ‘‘section 1256 contract’’ shall not include any securities futures 

contract or option on such a contract unless such contract or option is a 

dealer securities futures contract. 

IV. Petitioners’ Contentions

Petitioners contend that under the plain meaning of section 1256(g)(2)(A), as amended in 1984, major foreign currency options are foreign currency contracts subject to the 

marked-to-market rules of section 1256. To support their 

position they maintain that section 1256(b)(2) refers to ‘‘any 

foreign currency contract’’. Therefore, section 1256(g)(2)(A) 

should be construed broadly because ‘‘contract’’ is an inherently broad term, and an option, by definition, is a unilateral 

contract. 1 Restatement, Contracts 2d, sec. 25 (1981). They 

262 134 UNITED STATES TAX COURT REPORTS (248) 

12 Neither party claims that the major foreign currency options in this case are nonequity options, dealer equity options, listed options, dealer securities futures contracts, or options on such 

contracts pursuant to sec. 1256(b)(3) through (5) inclusive. 

argue there are no legally significant differences among 

futures, forwards, and options. 

Second, petitioners note that no regulations have been 

issued by the Secretary since 1982 which would limit the 

definition of a foreign currency contract, and, in petitioners’ 

view, the application of section 1256 to various types of contracts has been expanded and broadened over time. Petitioners reason that this constant expansion, coupled with the 

inherently broad original defining term ‘‘contract’’, suggests 

that where a close call is to be made on this issue, the history favors including major foreign currency options within 

the meaning of ‘‘foreign currency contract’’. 12

Third, petitioners maintain that there are no economically 

significant differences among foreign currency forwards, 

futures, and options. As petitioners state in their posthearing 

memorandum: 

All of these derivatives accomplish the same economic access to currency 

risk. They reproduce the economic risks and rewards of holding a particular foreign currency over time. These derivatives only differ in their 

pricing, timing and payment structure, and thus, can be modified or transformed into one another by entering into other derivatives. For example, 

an option writer fearing a movement in the underlying security adverse to 

his position can purchase a future on that security to effectively offset his 

risk, or he could write a contraindicated option as Petitioners did here. 

Fourth, petitioners contend, under the plain meaning of 

the statute, if the Court finds that (1) an option is a contract; 

(2) the value of the option depends on the value of the euro; 

(3) the euro is a major foreign currency traded on the interbank market; and (4) the option was entered into at arm’s 

length and with a price coinciding with the interbank market 

price for such options, section 1256(g)(2)(A) ‘‘compels the 

conclusion that all major foreign currency derivatives created 

on the informal interbank market [including the major currency options at issue in this case] should be marked to 

market’’. 

V. Respondent’s Contentions

Respondent contends that under the plain meaning of section 1256 a foreign currency option cannot be a foreign curVerDate 0ct 09 2002 11:08 May 24, 2013 Jkt 372897 PO 20009 Frm 00015 Fmt 2847 Sfmt 2847 V:\FILES\SUMMITT.134 SHEILA
(248) SUMMITT v. COMMISSIONER 263

rency contract; i.e., a section 1256 contract. Respondent notes 

that, as originally enacted in 1982, section 1256(g)(1)(A) 

referred to a contract that required delivery of a foreign currency. The writer of a forward contract is required to deliver 

a foreign currency at a future date at an agreed price. On the 

other hand, respondent points out that, at the time an option 

is signed, there is no obligation to deliver. An obligation to 

deliver occurs only if the holder of the option exercises its 

right to require delivery at some future time after the option 

has been signed. The obligation to deliver may never occur 

if the option holder allows the option to lapse. Consequently, 

respondent argues that, because section 1256(g)(1)(A), as 

originally enacted, referred to a contract that required 

delivery of the foreign currency, the section, as so enacted, 

could be applied only to forward contracts, not to options. 

Respondent also contends that the addition of the phrase 

‘‘or the settlement of which depends upon the value of ’’ in 

DEFRA was intended to deal with uncertainty as to whether 

cash-settled forward contracts were included in the definition 

of foreign currency contracts. In respondent’s view, the 

change was not intended to expand the application of section 

1256 to foreign currency option contracts because the limiting phrase ‘‘which requires delivery of ’’ was left in the 

statute. Respondent argues that foreign currency contracts 

can be physically settled or cash-settled, but they still must 

require settlement at expiration. In support of his position, 

respondent directs us to the House Ways and Means Committee report explaining the provisions of DEFRA, which 

states: 

Because certain contracts may call for a cash settlement by reference to 

the value of the foreign currency rather than actual delivery of the currency, the bill provides that the delivery of a foreign currency requirement 

is met where the contract provides for a settlement determined by reference 

to the value of the foreign currency. [H. Rept. 98–432 (Part 2), at 1646 

(1984); emphasis added.] 

VI. The Court’s Holding on Section 1256

Each party claims that the plain meaning of section 

1256(g)(2)(A)(i) supports his position. In Campbell v. 

Commissioner, 108 T.C. 54, 62–63 (1997), we set out the 

well-established and well-understood rules for construing a 

provision of the Internal Revenue Code: 

264 134 UNITED STATES TAX COURT REPORTS (248) 

In construing * * * [a provision of the Internal Revenue Code], our task 

is to give effect to the intent of Congress, and we must begin with the 

statutory language, which is the most persuasive evidence of the statutory 

purpose. United States v. American Trucking Associations, Inc., 310 U.S. 

534, 542–543 (1940). Ordinarily, the plain meaning of the statutory language is conclusive. United States v. Ron Pair Enters. Inc., 489 U.S. 235, 

242 (1989). Where a statute is silent or ambiguous, we may look to legislative history in an effort to ascertain congressional intent. Burlington N. 

R.R. v. Oklahoma Tax Commn., 481 U.S. 454, 461 (1987); Griswold v. 

United States, 59 F.3d 1571, 1575–1576 (11th Cir. 1995). However, where 

a statute appears to be clear on its face, we require unequivocal evidence 

of legislative purpose before construing the statute so as to override the 

plain meaning of the words used therein. Huntsberry v. Commissioner, 83 

T.C. 742, 747–748 (1984); see Pallottini v. Commissioner, 90 T.C. 498, 503 

(1988), and cases there cited. 

We will therefore begin with the statute. The plain meaning 

of the words used will control unless there is unequivocal evidence of legislative purpose to override such meaning. 

For convenience, we again set out section 1256(g)(2)(A), 

which defines a foreign currency contract to be a contract—

(i) which requires delivery of, or the settlement of which depends on the 

value of, a foreign currency which is a currency in which positions are also 

traded through regulated futures contracts, 

(ii) which is traded in the interbank market, and 

(iii) which is entered into at arm’s length at a price determined by reference to the price in the interbank market. 

Petitioner views the legal distinction between a forward 

and an option to be insignificant. We disagree. A forward foreign currency contract is a bilateral contract between a seller 

and a buyer that obligates the seller, at the time of signing, 

to settle his obligation to perform by either delivering the 

currency or making cash settlement. Conlon & Aquilino, 

supra par. A1.02[2][a][i]. A foreign currency option is a unilateral contract that does not require delivery or settlement 

unless and until the option is exercised by the holder. An 

obligation to settle may never arise if the holder does not 

exercise its rights under the option. It is clear that, as originally enacted in 1982, section 1256(g)(1) applied only to forward contracts. The statute referred to a contract which 

required delivery of the foreign currency, not to a contract in 

which delivery was left to the discretion of the holder. 

It is also clear that the 1984 amendment ‘‘or the settlement of which depends on the value of ’’ was inserted to allow 

(248) SUMMITT v. COMMISSIONER 265

13The amendment is similar to that proposed by the Senate for cash-settlement of regulated 

futures contracts in 1982. See S. Rept. 97–592, at 276 (1982), 1983–1 C.B. 475, 485–486. 

14The maxim expressio unius est exclusio alterius, meaning that to express or include one 

thing implies the exclusion of the other, or of the alternative, applies. Black’s Law Dictionary 

661 (9th ed. 2009); see United States v. Smith, 499 U.S. 160, 167 (1991) (‘‘ ‘Where Congress explicitly enumerates certain exceptions * * * additional exceptions are not to be implied, in the 

absence of evidence of a contrary legislative intent.’ ’’ (quoting Andrus v. Glover Constr. Co., 446 

U.S. 608, 616–617 (1980))). 

a cash-settled forward contract to come within the term ‘‘foreign currency contract’’. Foreign currency contracts can be 

physically settled or cash-settled, but they still must require, 

by their terms at inception, settlement at expiration. 13 The 

statute’s plain language is dispositive. There is no evidence 

in the legislative history that a literal reading of the statute 

will defeat Congress’ purpose in enacting it. Campbell v. 

Commissioner, supra at 62–63. 

Petitioners argue, by negative inference, that if the Secretary had wished to identify a foreign currency option as a 

‘‘contract (or type of contract)’’ to be ‘‘[excluded] from the 

application of subparagraph (A)’’ of section 1256(g)(2), the 

Secretary would have exercised the authority, expressly delegated by subparagraph (B), to prescribe regulations for that 

purpose. We disagree. The Secretary has not issued regulations bringing a foreign currency option within the definition 

of a foreign currency contract. That determination is within 

the province of the Secretary, not within the province of this 

Court. Moreover, the statute, as we understand it, speaks for 

itself. 

Petitioners’ contention that an option is a contract and 

that the addition by Congress of other option contracts to 

section 1256 over the years evidences an intent to include 

major foreign currency options also fails. Granted, an option 

is a contract and Congress has added other option contracts 

that qualify for section 1256 treatment. However, Congress’ 

additions have been restricted to nonequity options, dealer 

equity options, and options on dealer securities futures, all of 

which are traded on a qualified board or exchange. Sec. 

1256(b)(3)–(5), (g)(3)–(6). Interbank markets have not been 

designated as a qualified board or exchange. Sec. 1256(g)(7). 

When Congress has specified the types of contracts that come 

within the definition of a section 1256 contract, exclusion of 

others from its operation may be inferred. 14 There is no eviVerDate 0ct 09 2002 11:08 May 24, 2013 Jkt 372897 PO 20009 Frm 00018 Fmt 2847 Sfmt 2847 V:\FILES\SUMMITT.134 SHEILA
266 134 UNITED STATES TAX COURT REPORTS (248) 

dence of legislative intent to designate foreign currency 

options as section 1256 contracts. 

Petitioners also contend that futures, forwards, and options 

‘‘accomplish the same economic access to currency risk’’ and 

should be treated the same way under the tax laws. However, petitioners admit that futures, forwards, and options 

differ in their pricing, timing, and payment structures. It is 

precisely these economic and legal distinctions that give rise 

to disparate treatment under the tax laws. 

VII. Conclusion and Holding

With respect to the first issue presented to us by respondent’s motion for partial summary judgment, we hold that 

under section 1256, the major foreign currency option 

assigned by Summitt to the charity is not a foreign currency 

contract as defined in section 1256(b)(2) and (g)(2), and the 

marked-to-market provisions of section 1256 do not apply to 

the transfer of the EUR call option (3032) to the charity. As 

a result, petitioners did not recognize a loss in 2002 on the 

EUR call option (3032) pursuant to section 1256. 

The second issue raised by respondent’s motion for partial 

summary judgment deals with the recognition of gain upon 

assignment of the minor foreign currency call option to 

charity. That issue cannot be dealt with isolated from the 

facts involved in the transaction as a whole, and therefore, 

respondent’s motion on the second issue will be denied. 

To reflect the foregoing, 

fAn appropriate order will be issued.