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

7 Petitioners executed a Form 872, Consent to Extend the Time to Assess Tax, extending the time to assess for 2002 to Apr. 15, 2007.

8 The Court received the petition on June 18, 2007, but the petition was postmarked and deemed filed on June 12, 2007.

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

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

9A 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).

11 See 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.

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,

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).]