The opinion
T.C. Memo. 2011-292
UNITED STATES TAX COURT
TERRY L. AND CHERYL A. WRIGHT, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 30957-09. Filed December 22, 2011.
Frank O’Neal Hendrick, for petitioners.
Tammra S. Mitchell, for respondent.
MEMORANDUM OPINION
WELLS, Judge: The instant case is before the Court on
respondent’s motion for partial summary judgment pursuant to Rule
121.1 The sole issue we are asked to decide is whether an over-
1
Unless otherwise indicated, section references are to the
Internal Revenue Code of 1986, as amended, and Rule references
are to the Tax Court Rules of Practice and Procedure.
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the-counter foreign currency option entered into by a limited
liability company wholly owned by petitioners was a “foreign
currency contract” as defined in section 1256(g)(2).
Background
The facts set forth below are based upon examination of the
parties’ pleadings, moving papers, responses, and attachments.
Petitioners are husband and wife who resided in Tennessee at
the time of filing the petition. At all relevant times,
petitioners each owned 50 percent of Cyber Advice, LLC (Cyber
Advice), a Georgia limited liability company. Petitioner Terry
L. Wright (Mr. Wright) was president of Cyber Advice and its
member manager. During 2002 Cyber Advice was taxable as a
partnership for Federal income tax purposes.
During 2002 Cyber Advice authorized Multi National
Strategies, LLC (Multi National), to engage in various over-the-
counter foreign currency option transactions. Mr. Wright and
Multi National agreed that Beckenham Trading Company, Inc.
(Beckenham), would serve as the counterparty to the foreign
currency option transactions. During December 2002 Cyber Advice
purchased from Beckenham nine over-the-counter foreign currency
options, and it sold to Beckenham nine offsetting over-the-
counter foreign currency options. In his motion for partial
summary judgment, respondent contests only Cyber Advice’s
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reporting of one of those transactions, so we will describe only
that transaction.
On December 20, 2002, Cyber Advice purchased a euro put
option for a premium of $36,177,750 (the euro put option). The
euro put option gave Cyber Advice the right to sell to Beckenham
on the expiration date of the option €1,237,477,902 for
$1,260,000,000. On December 23, 2002, Beckenham, Cyber Advice,
and the Foundation for Educated America, Inc. (FEA), entered into
an agreement whereby they assigned the euro put option to FEA.
At the time the euro put option was assigned to FEA, it was
valued at $33,018,574. Relying upon Greene v. United States, 79
F.3d 1348 (2d Cir. 1996), Cyber Advice took the position that the
assignment of the euro put option to FEA resulted in a
termination as defined in section 1256(c). With respect to the
transaction involving the euro put option, Cyber Advice therefore
reported a short-term capital loss of $3,159,176 on Schedule D,
Capital Gains and Losses, of its 2002 Form 1065, U.S. Return of
Partnership Income. Because Cyber Advice was taxed as a
partnership during 2002, the effects of that loss flowed through
to petitioners.
Petitioners timely filed their Federal income tax return for
2002. Respondent subsequently issued a notice of deficiency, and
petitioners timely filed their petition with this Court.
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Discussion
Rule 121(a) allows a party to move “for a summary
adjudication in the moving party’s favor upon all or any part of
the legal issues in controversy.” Summary judgment is
appropriate “if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable materials,
together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that a decision may be
rendered as a matter of law.” Rule 121(b). Facts are viewed in
the light most favorable to the nonmoving party. Dahlstrom v.
Commissioner, 85 T.C. 812, 821 (1985). The moving party bears
the burden of demonstrating that no genuine issue of material
fact exists and that the moving party is entitled to judgment as
a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518,
520 (1992), affd. 17 F.3d 965 (7th Cir. 1994). We conclude that
partial summary judgment is appropriate in the instant case
because the material facts are not in dispute. The parties’ only
disagreement is the proper interpretation of section 1256.
Section 1256(a)(1) generally permits certain financial
instruments to be marked to market on the last business day of
the taxable year. Any gain or loss on those contracts is
included on the taxpayer’s Federal income tax return. Sec.
1256(a)(1). Section 1256(b) defines a “section 1256 contract” to
include: (1) Any regulated futures contract; (2) any foreign
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currency contract; (3) any nonequity option; (4) any dealer
equity option; and (5) any dealer securities futures contract.
Section 1256(b) excludes from the definition of a “section 1256
contract” any securities futures contract or option on such a
contract unless the contract or option is a dealer securities
futures contract. Section 1256(c)(1) applies the mark-to-market
rule from section 1256(a) to instances where taxpayers terminate
or transfer their obligations or rights under a regulated futures
contract.
A “regulated futures contract” means a contract with respect
to which the amount required to be deposited and the amount which
may be withdrawn depend on a system of marking to market and
which is traded on or subject to the rules of a qualified board
or exchange. Sec. 1256(g)(1). 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(g)(2) defines a “foreign currency contract” as
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 future contracts,
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(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.
We have discussed the language, requirements, and legislative
history of section 1256 in more detail in Summitt v.
Commissioner, 134 T.C. 248 (2010).
Because the euro put option Cyber Advice assigned to FEA was
denominated in a major currency, it is a major foreign currency
option. A major foreign currency is a “currency in which
positions are * * * traded through regulated futures contracts”.
Sec. 1256(g)(2)(A)(i). Major currencies include the U.S. dollar,
British pound, Japanese yen, Swiss franc, and European Union
euro.
Petitioners contend that a major foreign currency option is
a “foreign currency contract” subject to the mark-to-market rules
of section 1256. Petitioners further contend that, pursuant to
section 1256(c) and Greene v. United States, supra, when they
assigned their major foreign currency option to a charity, that
assignment constituted a termination of the contract requiring
them to recognize their loss.
Respondent’s motion asks us to decide whether a major
foreign currency option is a “foreign currency contract”
qualifying for section 1256 treatment. We have already decided
that issue in Summitt v. Commissioner, supra, and in Garcia v.
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Commissioner, T.C. Memo. 2011-85. In both of those cases, we
held that a major foreign currency option is not a foreign
currency contract.
In Summitt v. Commissioner, supra at 264, we analyzed the
“delivery” or “settlement” requirement under section 1256(g)(2),
concluding:
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, * * * [the statute] 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.
We further held that the phrase “or the settlement of which
depends on the value of” in section 1256(g)(2)(A)(i), which was
added to the original statute pursuant to the Deficit Reduction
Act of 1984, Pub. L. 98-369, sec. 722(a)(2), 98 Stat. 972, was
added:
to allow 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. * * *
Summitt v. Commissioner, supra at 264-265. On the basis of our
conclusion that the plain language of the statute was
“dispositive”, we held that a foreign currency option does not
fall within the meaning of a “foreign currency contract” under
section 1256(g)(2). Id. at 265.
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Petitioners do not attempt to factually distinguish the
instant case from Summitt and Garcia. Rather, petitioners
contend that Summitt and Garcia were wrongly decided. We
disagree. Following Summitt and Garcia, we hold that Cyber
Advice’s major foreign currency option was not a “foreign
currency contract” as defined in section 1256(g)(2).
Accordingly, we will grant respondent’s motion for partial
summary judgment.
In reaching these holdings, we have considered all the
parties’ arguments, and, to the extent not addressed herein, we
conclude that they are moot, irrelevant, or without merit.
To reflect the foregoing,
An appropriate order will be
issued.