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between PCB and Cherry as steps in FRGC’s continuing efforts to
acquire the subject property. FRGC’s expenses in 1997 were
incurred in negotiating the purchase agreements and in settling
the contingencies and were directly related to acquiring suitable
property for Flagstaff Ranch.
Our holding is consistent with the decision of this Court in
Nicolazzi v. Commissioner, supra, in which the taxpayer
participated in a lottery program to acquire leases on Federal
lands for oil and gas exploration and development. The taxpayer
filed applications on approximately 600 leases and was successful
in obtaining a lease. After applying the “substance over form”
mandate of the regulations to the facts, we concluded that the
relevant transaction was the taxpayer’s investment in the lottery
program and that whether he sustained a loss was measured by
reference to the aggregate of the lease applications. “To hold
otherwise would simply disregard the realities of the situation.”
Id. at 131. Accordingly, we held that no portion of the fee that
was paid for the lottery program was deductible as an abandonment
loss, because the taxpayer acquired an interest in a valuable
lease and did not sustain a bona fide loss on his investment
during the taxable year.
FRGC entered into a new purchase agreement with Cherry on
January 15, 1998, only 2 weeks after the cancellation of the 1996
purchase agreement. Although we do not dispute petitioner’s
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