-58-
the right to improve the property without the sellers' consent;
and (7) had the right to obtain legal title at any time by paying
the balance of the full purchase price. Grodt & McKay Realty,
Inc. v. Commissioner, supra at 1237-1238.
In this case, the Woods had the right to possess the
property, the right to obtain legal title by paying the balance
of the full purchase price, and the duty to maintain the property
and to pay insurance costs and taxes (under one agreement). The
Woods did not bear the risk of loss. This factor weighs in favor
of the agreement's being treated as a sale.
3. Compelling the Exercise of the Option
Under California law, an instrument is a contract of sale if
the optionee has an obligation to buy that the owner can enforce
by specific performance. Welk v. Fainbarg, 255 Cal. App.2d 269,
63 Cal. Rptr. 127, 132-133 (1967). Neither the Lease Option nor
the Real Estate Purchase Option provided that petitioners could
force the Woods to purchase 15 Hastings.
4. Intent of the Parties
Petitioner testified that title to 15 Hastings was never
transferred to anyone. Petitioners treated the agreement with
the Woods as a lease on their 1990 return. Mr. Wood testified
that he and Mrs. Wood were not renting 15 Hastings. Mr. Wood
classified the transaction, however, as a lease/option purchase
contract. Mrs. Wood said the agreement was initially
contemplated as a lease option. Mrs. Wood testified that their
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