-56-
proceeds for it are reportable as taxable income or as a
nontaxable return of capital and (2) if the option proceeds are
income to the grantor of the option, the character of the income
as capital or ordinary must be determined. See Old Harbor Native
Corp. v. Commissioner, 104 T.C. 191, 200 (1995). These
considerations remain even though the grantor retains the option
amount whether or not the option is exercised. See Hicks v.
Commissioner, T.C. Memo. 1978-373. Petitioners, although they
had control over and had unfettered use of the $10,000 in 1989,
had income in the year the option lapsed, 1991.
15 Hastings--Lease Versus Sale
We now must decide whether the "Lease Option" executed on
November 1, 1989, and the "Real Estate Purchase Option" executed
on November 3, 1989, effected a sale or a lease with an option to
buy. If we decide that the agreements effected a sale, we must
then decide the proper characterization of the payments received
by petitioners and the expenses claimed by petitioners.
Respondent argues that petitioners mischaracterized the
agreement by reporting the related items as though the agreement
were a lease instead of a sale. Petitioners contend that they
properly characterized the transaction as a lease with an option.
In this instance, we are not required to decide which of the two
agreements, the Lease Option or the Real Estate Purchase Option,
represented the bargain between petitioners and the Woods.
Whether a sale is complete for Federal tax purposes depends
on all of the facts and circumstances. Derr v. Commissioner, 77
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