Rev. Rul. 83-69

1983-1 C.B. 126.

                       Internal Revenue Service
                                 Revenue Ruling

              REGULATED INVESTMENT COMPANY;  CALL OPTIONS;  ISSUER

                           Published: April 18, 1983

SECTION 851. - -DEFINITION OF REGULATED INVESTMENT COMPANY, 26 CFR 1.851-2: Limitations

  Regulated investment company;  call options;  issuer.  For purposes of section 851(b)(4) of the Code, exchange-traded call options are securities and the issuer is the corporation whose stock or securities underlie the options.

ISSUE

  Do exchange-traded call options acquired by the taxpayer qualify as securities for purposes of section 851(b)(4) of the Internal Revenue Code?  If the options are securities for purposes of section 851(b)(4), who is the "issuer" of the options under section 851(b)(4)?

FACTS

  The taxpayer is a newly organized company that is registered with the Securities and Exchange Commission as a management, open-end, diversified investment company under the Investment Company Act of 1940, as amended (54 Stat. 789, 15 U.S.C. 80a-1 to 80b-2).

  The taxpayer invests in call options traded on any of the several national securities exchanges where options are traded that give the taxpayer (holder) the right to buy 100 shares of the underlying security covered by the option at the stated exercise price at any time prior to the expiration date.

LAW AND ANALYSIS

  Section 851(b)(4) of the Code provides that a corporation shall not be considered a regulated investment company for any tax year unless at the close of each quarter of the tax year (1) at least 50 percent of the value of the corporation's total assets is represented by cash and cash items, Government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the corporation's total assets and to not more than 10 percent of the issuer's outstanding voting securities, and (2) not more than 25 percent of the value of the corporation's total assets may be invested in the securities (other than Government securities or the securities of other regulated investment companies) of any one issuer.

  Section 851(c) of the Code provides definitional rules applicable to section 851(b)(4).  Section 851(c)(5) provides that if a term is not defined the definition of the term contained in the Investment Company Act of 1940, as amended, will be applicable.

  While there is nothing in either the Code or the Income Tax Regulations defining the words "securities" or "issuer" for purposes of section 851(b)(4), Congress in S. Rep. No. 94-1236, 94th Cong., 2d Sess. 544 (1976), 1976-3 (Vol. 3) C.B. 807, 948, relating to the Tax Reform Act of 1976, Pub.L. No. 94-455, 1976-3 (Vol. 1) C.B. 1, stated that "[f]or purposes of section 851(b)(4), the 'issuer' of an option is the corporation whose stock or securities underlie the option (even though the option may be written by an options exchange, for example)."  This statement contains a specific definition of an option's issuer for purposes of section 851(b)(4) and can be regarded as the equivalent of a statutory definition of this term for purposes of section 851(c)(1) through (4).  In addition, because section 851(b)(4) refers to issuers of securities, the statement in S. Rep. No. 94-1236 regarding the issuer of an option clearly indicates that Congress considers stock options to be securities for purposes of section 851(b)(4).

HOLDING

  For purposes of section 851(b)(4) of the Code, the exchange-traded call options are securities and the issuer is the corporation whose stock or securities underlie the options.

Rev. Rul. 83-69, 1983-1 C.B. 126.