46
Respondent maintains that the stock could not possibly have lost
that much value.
We disagree with respondent's contention that the option was
a sham. We rejected a similar contention in Belz Inv. Co. v.
Commissioner, 72 T.C. 1209, 1224-1228 (1979), affd. 661 F.2d 76
(6th Cir. 1981), where the Commissioner argued that the
taxpayer's exercise of an option was inevitable. The lease
granted the taxpayer an option to repurchase a motel after 10
years based on the amount the buyer-lessor paid for the motel,
reduced by the excess of rental payments over a specified amount.
We concluded that exercise of the option was not inevitable. We
noted that the buyer-lessor negotiated the option price at arm's
length. Id. at 1226, 1229. Similarly, the option price in the
instant case was negotiated at arm's length as part of the 1983
transaction with Sawyer. An option is generally not a sham if
purchased as part of an arm's-length transaction. See Cobb v.
Commissioner, T.C. Memo. 1985-208.
It was not certain in 1983 that Brown's sons would exercise
the option. The parties did not know whether the option price
would be less than the value of Bengals stock in 10 years and
could not predict events that would occur in those 10 years that
would affect the value of the stock. Brown's sons might have
decided to exercise the option for less than 329 shares or not at
all.
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