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transaction. The option expired. There were negotiations. The
exchange of stock for assets occurred, apparently in 1985, and
perhaps on terms more favorable to IRC’s and RIC’s shareholders
than were provided for in the option agreement.
From the foregoing, it is clear that (1) the “upcoming
business” was Systems’, (2) IRC and RIC were created to provide
investment capital for Systems’ trade or business, and (3), if
things worked well, then IRC and RIC would end up with Systems
stock and not with their own trade or business.
Although the R & D Agreement appeared to provide IRC and RIC
with rights that theoretically they might be able to exploit in
their own trades or businesses, (1) neither party to the R & D
Agreement bothered to comply with some of the Agreement’s
specific obligations, and (2) if the rights really turned out to
be valuable, then Systems had an absolute right to acquire them.
In fact, even though Systems let the option agreement expire,
that merely resulted in a negotiated merger into Systems and not
trades or businesses for IRC and RIC. Thus, although the 1985
events deviated from the 1984 option agreement, the 1985 events
confirmed17 that element of the 1984 option agreement that
controls for our purposes--Systems bought out IRC’s and RIC’s
17See Levin v. Commissioner, 832 F.2d 403, 406 n.3 (7th Cir.
1987), affg. 87 T.C. 698 (1986); MedChem (P.R.), Inc. v.
Commissioner, 116 T.C. 308, 310 n.2 (2001), on appeal (1st Cir.,
Aug. 24, 2001).
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