In CCA 201547004, the IRS Office of Chief Counsel concludes that certain contracts, styled as “cash-settled equity barrier call options,” should not be treated as options for tax purposes.  The taxpayer entered into such contracts with a bank in order to gain exposure to U.S. and foreign hedge funds.  The CCA reasons that, although labeled as options, the contracts lacked the essential economic and legal characteristics of options.  In particular, according to the CCA, two elements of the contracts between the taxpayer and the bank were contrary to the typical functioning of an option: (i) the interplay between the contracts’ premiums, cash settlement amounts, and the barrier provisions, which imposed costs upon the taxpayer similar to an obligated buyer and precluded any possibility of lapse; and (ii) the taxpayer’s ability to alter the basket while the contracts remained open.