year these payments were received because these payments were not to be used to reduce the stated purchase price of the property, he has not specifically waived this contention. We therefore consider this issue to still remain in the case. In the Virginia Iron Coal & Coke Co. case, we stressed that it was impossible to tell when the payments were received whether they would ultimately represent income to the taxpayer or a return of capital. We pointed out that the payments were to be applied against the purchase price in case of the exercise of the option and that, therefore, only upon termination of the option would it be apparent whether the payments represented clear gain to the taxpayer rather than a return of capital. We also stressed the fact that even though the payments were received in the earlier years without any obligations to return them, there was the condition attached to their receipt that they had to be applied against the purchase price in case the option was exercised. We then stated (37 B.T.A. at 199): That one condition is the determining factor in this case. Until it was removed in 1933, the question of the liability of the recipient for income tax upon the payments had to be held in abeyance. Similar cases of forfeiture arise under contracts of sale and are treated the same way. 串 Insofar as we have been able to determine in other cases involving the treatment of option payments, either the contract has clearly provided that the payment would be offset against the purchase price of the property which was the subject of the option or we have concluded from the contract as a whole that in fact the payment was at least partially a part of the purchase price if the options were exercised. Dill Co., supra, involved a contract whereby the taxpayer granted a license to a corporation to manufacture a product owned by it under a trademark for a stipulated royalty. The license was granted for a period of 5 years with the option to the licensee to purchase the trademark at the end of the 5year period upon payment of $350,000, or upon payment of $50,000 obtain a 5-year extension of the license agreement with the right at the close of any calendar year during the additional 5-year period to purchase the taxpayer's interest in the trademark for $300,000. In that case we stated (33 T.C. at 199): On the one hand it appears the $50,000 was paid in consideration for a 5year extension of the license agreement; and yet, on the other, it seems clear that the payment was also intended to reduce or be applied against the agreed purchase price in the event the option to purchase was exercised. There was no specific statement in the contract in the Dill case that the $50,000 was to be credited on the purchase price of the trademark. In fact, such an inference could be drawn only from the fact that during the second 5-year period the agreed purchase price was reduced by $50,000. We concluded (33 T.C. at 200) that "the $50,000 payment was intended to serve both as consideration for the extension of the agreement, and as a payment on account of the purchase price should the option to purchase be exercised." We therefore held that the character of the $50,000 payment could not be determined until either the option to purchase was exercised or lapsed, relying on Virginia Iron Coal & Coke Co., supra. In the Dill case we distinguished cases such as Gilken Corp., 10 T.C. 445 (1948), affd. 176 F.2d 141 (6th Cir. 1949), on the ground that such cases involved whether a contract was one of sale or of rental, making it necessary to determine whether a lump sum payment was an initial rental payment or a part of the sales price. See also Kitchin v. Commissioner, supra. In the instant case we have little to turn to other than the provisions of the contracts themselves to determine whether the negotiated purchase price was in fact less than it would have been had the option payments been used as a reduction of that price. If the purchase prices were less than they would have been had the option payments been used to reduce those prices if the option were exercised, then, in effect, the option payments did serve as a reduction of purchase price. Certainly, when an option is granted fixing a purchase price for property for a period of years, it is reasonable that a payment be required to compensate the grantor of the option for the normally to be expected increase in the price of the property under option, since he is obligated to deliver the property at the stated price but the person to whom the option is given is not obligated to purchase the property.3 3 In this respect, petitioner testified as follows: MR. EMMANUEL: In granting him these options, what was your intention with respect to the option period? A. Well, he insisted on a five year option, in other words, the hind-sight is always better than foresight and looking backwards, I didn't know at that time that the price Since the grantor of the option has use of the property until the option is exercised, under some circumstances returns from the use of the property while it is under option would serve the function that interest might serve had a sale been made of the property and the property delivered to the purchaser. However, under other circumstances where the property is not income-producing, as apparently was the case here, the only return from the land while held by petitioner was the anticipated increase in its value. There is no indication in the record in this case that petitioner's land land was returning any income. However, presumably some use might have been made of the land while it was still owned by and in possession of petitioner, even though under option. Certainly it might be that the option payments contained some element of compensation for petitioner's being unable to immediately obtain money from the sale of property because of the property being under option. If this is assumed, then the option payments would be for the dual purpose of this form of compensation and for increment in value of the property. This latter purpose would effectively be the same as if the purchase price of property had been fixed to account for such expected increment and the option payments used to reduce that purchase price. Under such circumstances we held in the Dill case that the character of payment could not be determined until either the option to purchase was exercised or lapsed. of real estate was going up rapidly, but he insisted on having a five year option. Now if I'd had a one year option, which would have been fine, I could have changed the price of the land each year. I could have raised it according to the market value of it, but I was tied with five years as long as he kept up his payments. Q. And what were those payments, if you remember? A. Those were option payments quarterly, the first year was a total of 3% and after that a total of 6%, payable quarterly. Q. Do you know how those percentage points were arrived at? A. Well, that was about a customary amount for an option in this area at that time. But, that was for an annual option, on a five year, it should have perhaps been a little more, but anyway that was the agreement and I saw a prospect of disposing of a large amount of property and Q. Were those option payments intended by you to represent interest? A. I don't see how they could. If I had sold the property and taken back a mortgage, then they would have been interest, but there was no sale of the property, just an option. Q. Did you consider yourself committed by these options? A. Well, I was committed. It might be pointed out that respondent's Revenue Ruling 58-234, supra (see n. 1), reaches the conclusion with respect to option payments which are not to be used in reduction of the purchase price that the effect is no different than a higher price for the property reduced by the option payments if the option is exercised. Of course petitioner incorrectly failed to report the option payments received with respect to those properties where the options expired in the years here in issue. Other than with respect to these option payments, we hold that petitioner was correct in not reporting the option payments in the years here in issue. Decision will be entered under Rule 155. INTERNATIONAL AIR CONDITIONING CORPORATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT INTERNATIONAL MANUFACTURING COMPANY, AN OKLAHOMA CORPORATION, PETITIONER U. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket Nos. 5407-75, 5411-75. Filed October 20, 1976. Rule 70(a)(1), Tax Court Rules of Practice and Procedure.-As a prerequisite to partaking in any informal discussion, petitioners' counsel required respondent to answer detailed questions regarding facts, legal theories, case law, and other authorities on which respondent relied in computing petitioners' deficiencies. Held: Petitioners' counsel has not made a good faith effort to comply with the directive of Rule 70(a)(1) that urges the parties to undertake informal consultation or communication before utilizing formal discovery procedures. Therefore, petitioners' Interrogatories Motions and related Admissions Motions are denied. Tom G. Parrott, for the petitioners. OPINION WILES, Judge: On March 17, 1976, each petitioner filed a "Motion for Order Compelling the Respondent to Serve Adequate and Complete Answers to Petitioner's Interrogatories or to Render a Judgment by Default Against the Respondent" (Interrogatories Motions). On March 26, 1976, each petitioner filed a "Motion for Order to have the Petitioner's Request for Admissions Deemed Admitted" (Admissions Motions). Oral arguments on these motions were heard May 10, 1976, at Lubbock, Tex. The events leading to the argument of these motions are as follows: On March 18, 1975, respondent issued petitioners notices of deficiency. Subsequently, petitions and answers were properly filed with this Court. On December 16, 1975, petitioners mailed respondent a letter, the first paragraph of which reads: The petitioners in the above-entitled Tax Court cases are interested in accomplishing a mutually-satisfactory resolution of the issues involved therein at the earliest possible date. To this end, we would like to schedule a settlement conference to begin our efforts to resolve part, if not all, of these issues. However, before we will be able to effectively participate in a settlement conference, we need to be furnished with certain information which is necessary to clarify the adjustments set forth in the Notice of Deficiency. Following this first paragraph, petitioners then posed 42 paragraphs of questions. These questions included procedural matters such as the dates on which petitioners filed income tax returns, whether the statute of limitations had been extended, and if so, under what statutory provisions. Beyond mere procedural matters, petitioners posed questions of greater complexity including requests for "all legal theories and positions relied upon in support of respondent's determination"; "all facts and describe all documentary evidence relied upon in support of the legal theories and positions"; "all sections of the Code, Treas. Regs., and all Revenue Rulings, Court cases and other legal authorities relied upon in support of the legal theories and positions." Petitioners' December 16, 1975, letter also noted: * If you would prefer to furnish this information personally, we will reserve the conference room at our office for whatever date * * that is convenient for you. |