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option. In Halle, a corporation owned land, which the taxpayer
wanted to purchase. The taxpayer formed a limited partnership to
purchase all the stock of the corporation. The limited
partnership and the corporation entered into a stock purchase
agreement, which stated that “‘Seller hereby agrees to sell to
Buyer, and Buyer agrees to purchase from Seller’” the stock of
the corporation for $29 million. The agreement required the
limited partnership to pay a $3 million deposit and the balance
at settlement. The agreement permitted the limited partnership
to defer the settlement date by paying monthly installments of
$225,000. If the limited partnership defaulted, the contract
provided that it would forfeit the downpayment and monthly
installments already paid. The limited partnership paid the
seller $900,000 to defer settlement and deducted those payments
as settlement interest on its income tax returns. The
Commissioner disallowed the claimed interest deduction, arguing
that the agreement was an option.
The Court of Appeals for the Fourth Circuit examined the
language of the stock purchase agreement and the economic
substance of the transaction to determine whether the contract
was an option. The Court found that under the terms of the
agreement, the seller had an unconditional obligation to sell the
stock, the limited partnership had an unconditional obligation to
purchase the stock, and the agreement did not expressly provide
the limited partnership with the option to withdraw from the
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