Tax Court: OTC Foreign Currency Options are not Section 1256 Contracts

On a motion for summary judgment, the Tax Court rules that over the counter foreign currency options are not “foreign currency contracts” under Sec. 1256.

In some instances, and in this case, offsetting foreign currency options are used as part of a strategy to reduce federal income tax known as a major/minor transaction. Though not part of the court’s opinion here, the IRS might argue (and indeed may have argued) that this transaction is substantially similar to a “Son of Boss” transaction which it deems to be an abusive tax shelter. The effect of the court’s ruling in this case effectively denies the taxpayer the federal tax benefit realized by the transaction.

Read the opinion here:
Garcia v. Commissioner, TC Memo. 2011-85