Barry,

Generally, the seller of an option does NOT incur taxable income on the receipt of an option premium.  Instead, the option premium is held as an "open transaction" (ie. no current tax consequences) until the option is exercised, sold/terminated in a closing transaction, or lapses.  Similarly, the purchaser of an option does not get an immediate tax deduction when it pays an option premium.  

The ultimate tax impact to the option seller and purchaser depends on what happens with the underlying option.  For example, if the option is exercised, then the option seller adds the option premium to the strike price to determine the total amount realized on the sale of the underlying commodity.  (This total amount realized is then used to determine whether the seller has taxable gain or loss on the underlying sale).  From the option purchaser's perspective, the option premium is added to the strike price to determine its tax basis in the underlying commodity.

In the case where the option is allowed to lapse, the option seller treats the option premium as taxable income on the date that the option lapses.  Similarly, the option purchaser takes a deduction for the option premium on the date that the option lapses.

Hopefully this gives you a little bit of an overview of the general rules governing the taxation of options.  Notwithstanding the above overview, I would still like to visit with you regarding the proposed transaction as there are certain "exceptions" or "nuances" to the general rules that could apply.  As such, once you have had a chance to review, please give me a call at ext. 3-5846 so that we can discuss further.  Thanks.

MRC 

 

 -----Original Message-----
From: 	Tycholiz, Barry  
Sent:	Monday, October  29, 2001 7:32 AM
To:	Clark, Morris
Subject:	Taxable Income

Morris... if ENA were to sell options to a third party and receive the option premium up front... for example $ 10MM $'s.... would that be considered taxable income?

We would also be buying the option from another party or hedging this structure and this cash would be used to offset future liabilities related to the deal.

BT