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option fee from their account at Escrow Masters and deposited it
into California Federal account number 502396. The Woods decided
not to exercise their option on March 7, 1991.
Respondent argues that proceeds from binding legal options
are not taxed until the option is exercised or lapses.
Petitioners contend that the $10,000 was received by petitioners
in 1989 and was taxable in the year of receipt.
Petitioners rely on Estate of Gordon v. Commissioner, 17
T.C. 427 (1951), affd. 201 F.2d 171 (6th Cir. 1952). In Estate
of Gordon, a $25,000 "option" payment was taxable income to the
taxpayer-decedent in the year of receipt under a claim of right.
In Estate of Gordon, the decedent had inherited a theater and
business property from her husband. A man was interested in
acquiring the property and negotiated two instruments with the
decedent. The purchase price was $125,000, and decedent received
$25,000 initially and interest was to be computed on the balance
of the purchase price, with one of the instruments requiring
quarterly interest payments. The lessee was given the privilege
of purchase at any time at the expiration of 6 months after the
death of the decedent and undertook the insurance and real estate
tax responsibilities. No outright sale was accomplished because
the lessee was not bound to purchase the property.
The present situation is distinguishable from that in Estate
of Gordon. We incorporate herein the reasoning of the Court of
Appeals for the Third Circuit when it distinguished the option in
Estate of Gordon from true options:
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