580 F.2d 863
78-2 USTC  P 9725
Erwin G. BAUMER and Clara S. Baumer, Plaintiffs-Appellees,Cross-Appellants,v.UNITED STATES of America, Defendant-Appellant.SEVEN EIGHTY-EIGHT GREENWOOD AVENUE CORPORATION, Plaintiff-Appellee,v.UNITED STATES of America, Defendant-Appellant.
Nos. 76-3187 to 76-3189.
United States Court of Appeals,Fifth Circuit.
Sept. 25, 1978.

John W. Stokes, U. S. Atty., Atlanta, Ga., Gilbert E. Andrews, Act.  Chief, Appellate Sect., Dept. of Justice, Washington, D. C., John A. Townsend, Myron C. Baum, Acting Asst. Atty. Gen., Gary R. Allen, Francis J. Gould, Attys., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant.
Alex P. Gaines, Robert H. Hishon, Atlanta, Ga., for plaintiffs-appellees.
Appeals from the United States District Court for the Northern District of Georgia.
Before WISDOM, GOLDBERG and RUBIN, Circuit Judges.
GOLDBERG, Circuit Judge:


1
This appeal presents a novel variation of the recurrent problem of determining the tax consequences of transactions between closely held corporations and their shareholders.  Here a corporation granted an option to purchase a one-half interest in a parcel of real estate to the son of the corporation's sole shareholder for nominal consideration.  In the proceedings below, the district court held that the grant of this option resulted in a constructive dividend from the corporation to the father, measured by the ascertainable value of the option.


2
The government argues on appeal that the option was simply a device for shifting to the son half of the corporation's gain on the subsequent sale of the property to a third party purchaser.  Accordingly, for federal tax purposes the option itself should be ignored and the transaction treated as a sale of the entire property by the corporation to the ultimate purchaser accompanied by the distribution of a constructive dividend to the father.  The government contends that the value of this dividend should be the difference between the price paid by the son to exercise the option (the "exercise price") and the actual fair market value of the property interest acquired by the son.  In the alternative, the government argues that even if the district court correctly held that no tax is owed by the corporation and that the grant of the option, rather than the sale of the property to son, gave rise to the constructive dividend to the father, the court erred in its valuation of the benefit conferred by the option.


3
The father, son, and corporation ("taxpayers") cross appeal from the judgment of the district court.  They maintain that the option was granted to the son in an arm's-length transaction and that the district court erred in treating the option as a constructive dividend by the corporation to the father.


4
We find that the record supports the district court's conclusion that the grant of the option constituted neither an arm's-length transaction, on the one hand, nor an illusory event designed to shift the corporation's gain on the ultimate sale of the property to the son on the other.  On these issues we affirm the decision of the district court.  However, treating the grant of the option itself as a constructive dividend, we substantially agree with the government that the district court erred in its valuation of the benefit conferred on the son.  We therefore remand the actions involving the son and the father for redetermination of the value of the constructive dividend.

I. The Transaction

5
The facts of this case are largely undisputed, although the proper characterization of these facts is far from clear.  Taxpayer Erwin G. Baumer ("Father") is the father of taxpayer Erwin H. Baumer ("Son"), and, during the period in question, was the sole shareholder of taxpayer Seven Eighty-Eight Greenwood Avenue Corporation ("Corporation"), a Georgia corporation which owned and leased real estate in the Atlanta, Georgia area.1  Son is a real estate attorney.  In early 1965, Son became interested in purchasing a parcel of residential property on Piedmont Road in Atlanta.  In November, 1965, Son was offered the Piedmont property for $175,000.  Father, who was knowledgeable about property in the area, advised Son not to accept the offer.2  Son followed this advice.


6
Shortly thereafter, in January, 1966, Father was advised that an attractive investment property on Piedmont Road was for sale.  This turned out to be the same property that Son had been interested in just a few months earlier.  Corporation accepted an offer to purchase the property for $174,000 in late January, 1966.  The property was then zoned for residential use.


7
The district court found that the value of the Piedmont property for residential use was somewhat less than $175,000, but noted that at the time of the purchase, the neighborhood was ripe for transition to commercial use.  While the court could not determine whether the actual fair market value of the property was in excess of $175,000, it did find that the realization of any potential value in excess of $175,000 depended upon favorable rezoning to commercial uses.


8
When Father informed Son of this transaction, Son requested that the Corporation sell him an interest in the property.  Father agreed, and the Board of Directors authorized Corporation to sell Son a one-half interest in the property.  Father testified that he made this offer because he had originally advised Son against purchasing what Father later considered to be an attractive investment property.  Subsequently, the proposed transaction was modified and a written option was executed by Corporation and accepted by Son in early May, 1966.  The exercise price of the option for purchase of a one-half interest in the property was set at $88,000, approximately one-half interest of the corporation's cost basis, plus 51/2 percent interest calculated from the effective date of the option, February 7, 1966.3  The stated term of the option was one year from the effective date.  The option was exercisable immediately and without conditions, and the option privilege was assignable by Son.  The stated consideration for the option privilege was $10.00, which Son did not recall actually paying.


9
The district court found that Father and Son intended to use the Piedmont property to develop a motel.  Son, who had substantial legal experience in zoning matters, began investigating the possibility of rezoning the property for commercial use.  Upon discovering that the property could not be rezoned unless sewer services were provided, Son located an adjacent parcel of real estate on Old Ivy Road which had access to sewer facilities.  According to the district court's findings, Son's efforts were inspired by the fact that "he considered that he had an interest in the property."  In August, 1966, Corporation purchased the Old Ivy property for $25,000.


10
Because of this purchase, the combined properties became eligible for rezoning to a commercial classification.  Consequently, the value of the Piedmont property was substantially increased.  On January 12, 1967, approximately one month prior to the termination of the original options, the corporation granted Son an amended option which covered both the Piedmont and Old Ivy properties; set a new exercise price of $100,000, approximately one-half of Corporation's purchase price for the two properties, plus 51/2 percent interest; and extended the period during which the option could be exercised until June 30, 1969.  The amendment further provided that the option privilege was assignable by Son.  The stated consideration for these modifications was $10.00, which Son did not recall having paid.


11
In January 1967, Pope & Carter Co., Inc.  ("Pope & Carter"), an Atlanta real estate brokerage company, informed Father that it was interested in purchasing the Piedmont-Old Ivy property.  After negotiations participated in by Father, Son, and Pope & Carter, Corporation granted Pope & Carter an option to purchase the combined properties.  This option, which took effect on January 25, provided in relevant part that: (1) Pope & Carter was required to expend reasonable time and effort to obtain favorable C-1 zoning, which would permit motel use; (2) the option would remain open for six months without the payment of a cash consideration and could be extended for up to six additional months by paying Corporation $3,000 per month; (3) the option purchase price was $500,000; (4) any option extension payments were to be applied against the purchase price; and (5) the option was assignable.  Pope & Carter was aware of Son's interest in the property when it negotiated this option.


12
Pursuant to its obligations under the option, Pope & Carter expended substantial time and money to obtain the desired zoning.  The results were encouraging and beginning in July, 1967, Pope & Carter exercised its right to purchase monthly extensions on its option.  At the end of the one year option period, the Pope & Carter option was extended from January 24, 1968 through April 24, 1968 for a consideration of $1,000 per month.  From April 24, 1968 through December 27, 1968, additional extensions were granted for the nominal consideration of $1 per month "in view of the impending favorable zoning action."


13
On December 4, 1968, Pope & Carter's rezoning application was approved,4 with certain conditions, with respect to the Piedmont property.  The Old Ivy property was not rezoned.  Two days later, Son exercised his amended option on the Piedmont-Old Ivy properties.  On December 18, Son purchased a one-half undivided interest in the properties and tendered to Corporation a note for $114,501.23, bearing interest at 61/2 percent.  Nine days later, on December 27, Pope & Carter exercised its option to purchase the properties.  The district court found that the fair market value of the properties at that time at least equalled Pope & Carter's exercise price of $500,000.  The sale was closed on July 1, 1969, with an assignee of Pope & Carter actually making the purchase.


14
Son received $252,700 for his interest in the properties.  Most of this sum was payable in installments by Pope & Carter's assignee, Crow, Pope & Carter Construction Co.  Son's note to Corporation was subsequently modified to provide for payment coinciding with these installments.  The purpose of this modification was to permit Son to use the payments he would receive from Pope & Carter's assignee to satisfy the obligations arising from his purchase of the property.


15
On its federal tax return for the fiscal year ending November 30, 1969, Corporation reported a sale to Son of a one-half interest in the combined properties, showing no gain on this transaction.  Corporation also reported a sale to Pope & Carter's assignee of its second one-half interest in the combined properties.  On this transaction, Corporation reported a gain of one-half of the difference between its purchase price of the properties and the approximately $500,000 option purchase price paid by Pope & Carter's assignee.  Son reported on his 1969 income tax return a sale of one-half interest in the Piedmont-Old Ivy properties and a gain thereon valued at the difference between his own option price and one half the amount paid by Pope & Carter's assignee for the property.  Father reported no income on any of these transactions.


16
The Commissioner concluded that this option transaction constituted a device for transferring half of Corporation's gain on the properties at issue to Son and, accordingly, assessed additional taxes based on the determinations (1) that Corporation should be taxed on the entire gain from the sale to Pope & Carter's assignee and (2) that Father received a constructive dividend on Son's exercise of his option in 1968 and that such dividend was taxable to Father in the amount of the difference between the "bargain price" paid by Son on exercise of his option and the fair market value of the property as reflected by the Pope & Carter sale.5  Taxpayers paid the resulting deficiencies and instituted these refund proceedings in the district court.


17
The district court rejected the government's contention that the option was merely a device for transferring Corporation's gain on the sale of the properties to Son.  Accordingly, the court held that Corporation was not liable for the gain on the sale of Son's interest in the properties.  The court also rejected, however, the taxpayers' position that the grant of the option to Son was an arm's-length transaction.  The court found that the grant of the option, and its amendment, constituted distributions in 1966 and 1967 of corporate property resulting in a dividend to Father and a gift by him to Son.  These distributions "were without consideration and by virtue of Father's position as sole shareholder of the corporate plaintiff."  Finding the value of the distributions to be indeterminable in 1966 and 1967, the court applied the "open transaction" doctrine of Burnet v. Logan, 283 U.S. 404, 51 S.Ct. 550, 75 L.Ed. 1143 (1931), to defer recognition of the gain and consequent tax liability until 1968.  The court then valued the Son's option with reference to the $3,000 per month consideration paid by Pope & Carter for monthly extensions of its option.6


18
The government now appeals from the district court's judgment.  It maintains that the district court erred in not treating the option as a sham.  Thus according to the government, the entire gain from the sale to Pope & Carter's assignee is taxable to Corporation.  Since half of that gain was distributed to Son by means of the option sale of corporate property at a price far below the market value, Father should be liable for a constructive dividend of that amount.  Alternatively, the government asserts that the tax consequences to Father are the same even if the district court is correct in holding that no tax is owed by Corporation and that it was the grant of the option, and not the "bargain sale" of the property to Son, that gave rise to a constructive dividend.  According to the government, the district court erred in valuing the option with reference to the Pope & Carter option and under the open transaction doctrine, the value of the option should be determined by the spread between the option price and the fair market value of the property acquired at the time of exercise.7


19
Taxpayers cross appeal from the district court's conclusion that the grant of the option to Son resulted in a constructive dividend to Father, arguing that the option was granted in an arm's-length transaction.  Taxpayers also maintain that even if the grant of the option to Son was a taxable event, the resulting dividend to Father occurred in 1966 or 1967, years which are not in issue in these proceedings.

II. Imputing Son's Income to Corporation

20
We first examine the government's contention that the sale by Corporation to Son of a one-half interest in the property immediately prior to the exercise of the Pope & Carter option was a sham transaction designed to shift half of Corporation's gain on that impending sale to Son.  The government maintains that under the doctrine of Commissioner v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945),8 the district court should have taxed the Corporation on the entire gain from the sale to Pope & Carter.9


21
Our consideration of whether the entire gain from the sale to Pope & Carter should have been imputed to Corporation must begin with an analysis of Court Holding, supra, the principal Supreme Court pronouncement in this area.  There the corporation had orally agreed to sell its only asset, an apartment house, to a third party purchaser.  Subsequently, the corporation learned of the double tax that would arise if it first sold the property and then distributed the proceeds of the sale to its shareholders.  The corporation therefore refused to finalize the sale and instead distributed the property to its shareholders, who in turn sold it to the same third party purchaser on the same terms negotiated by the corporation.  The Tax Court found that in reality the sale was made by the corporation in performance of the prior agreement and attributed the gain to the corporation.  The Fifth Circuit reversed, disagreeing with the Tax Court's findings, and the Supreme Court reversed the Fifth Circuit, holding that the findings of the Tax Court was supported by the evidence.  The Court stated:


22
(T)he transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant.  A sale by one person cannot be transformed into a sale by another by using the later as a conduit through which to pass title.  To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.

65 S.Ct. at 708.10

23
The Supreme Court next considered the imputed income rule in United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 (1950).  In that case the shareholders of a corporation desired to liquidate their holdings, but their offer to sell their stock to a competitor was rejected.  The competitor countered with an offer to buy the corporation's assets.  The corporation, however, turned down this offer, and the shareholders of the corporation instead offered to acquire the assets from the corporation and to sell them to the competitor in their individual capacities, thereby avoiding capital gains treatment for the corporation.  The Commissioner attributed the gain from the sale to the corporation, but the Court of Claims refused to impute this gain to the corporation, finding as a factual matter that the sale had been made by the shareholders.  The Supreme Court affirmed, placing great emphasis on the fact that the liquidation and dissolution of the corporation genuinely ended its activities and existence.  The Court also stressed, however, the importance of the lower court's finding that the sale in question was made by the shareholders rather than by the corporation itself.


24
We had occasion to analyze the Court Holding and Cumberland cases in Hines v. United States, 477 F.2d 1063 (5th Cir. 1973).  In Hines we concluded that a basic principle established by the Supreme Court was that "the proceeds of the sale of property distributed by a corporation to its shareholders should be imputed to the corporation Only if the sale was in fact made by the corporation, not by the shareholders."  477 F.2d at 1069 (emphasis supplied).  The touchstone for this determination is whether the corporation Actively participated in the sale that produced the income to be imputed:


25
"(T)he Sine qua non of the imputed income rule is a finding that the corporation actively participated in the transaction that produced the income to be imputed.  Only if the corporation in fact participated in the sale transaction, by negotiation, prior agreement, postdistribution activities, or Participated in any other significant manner, could the corporation be charged with earning the income sought to be taxed."  477 F.2d at 1069-70 (emphasis in original).


26
In applying this standard, the courts have recognized that there are a potentially unlimited number of variations and permutations of transfers raising the Court Holding issue.  The characterization of a particular transaction as "real or a sham," Cumberland, supra, 70 S.Ct. at 282, depends in large measure on a subjective judgment based on the special facts of each case.  No appellate court, no matter how ingenious, can devise a simple, mechanical formula which will reveal the "correct" characterization of the transaction at issue in every instance.  As the Court held in Cumberland, "(i) t is for the trial court, upon consideration of the entire transaction, to determine the factual category in which a particular transaction belongs.  Here as in the Court Holding Co. case we accept the ultimate findings of fact of the trial tribunal."  70 S.Ct. at 282-83.


27
In the instant case, the district court concluded that the government's Court Holding theory was "inapplicable to the factual situation presented in this case," finding that the distribution of the option to Son occurred before a sale of the property was even contemplated,11 that Son was personally involved to a substantial extent in the development activity which led to the increased value of the Piedmont-Old Ivy properties,12 and that Son negotiated with Pope & Carter in his own behalf with respect to his interest in the properties.13  These findings must be accepted unless clearly erroneous.  Hines v. United States, supra, 477 F.2d at 1071 n. 11.14  Our review of the record convinces us that there is ample evidence to support the court's factual determinations.  We therefore affirm the court's judgment that this transaction was not stricken by Court Holding's selling virus.


28
In so holding we are not unaware of certain doubts raised by the government concerning the economic reality of the transactions between Corporation and Son.  The government correctly notes that the corporation bore all the risks with respect to the zoning action, which was necessary to make the purchase a profitable venture.  Son did not actually exercise his option and acquire title to the property until favorable zoning was obtained and the sale to Pope & Carter became a virtual certainty.  Furthermore, Corporation actively participated in the negotiations with Pope & Carter which led to the sale of the Piedmont-Old Ivy properties.  Son never expended a single cent on the transaction, either in acquiring the option or in exercising it.  Indeed, the note Son gave Corporation as payment for the properties was modified shortly after its execution to allow a pass through to Corporation of Pope & Carter's payments to Son.  The government further argues that, as a matter of law, the options granted by Corporation to Son were merely continuing offers to sell which did not transfer a present property interest to Son.  Were this the case, no property interest would have been transferred from Corporation to Son until after the agreement with Pope & Carter was negotiated and virtually consummated by Corporation.  To the extent Son participated in the negotiations before the sale from Father to Son, his activities would have been on behalf of Corporation since Son would have had no interest of his own.  In such circumstances, a finding that the sale of Son's interest to Pope & Carter's assignee was made by Son, rather than by Corporation, would be difficult, if not impossible, to support.


29
The critical link in this chain of reasoning by the government is its legal argument that the option is invalid under state law for lack of consideration.  We disagree.  In Smith v. Wheeler, 233 Ga. 166, 210 S.E.2d 702 (1974), the Supreme Court of Georgia held that an option to buy real estate was binding on the optionor even though the optionee failed to deliver the one dollar recited in the contract as the sole consideration for the option.  The Court reasoned that the recital to pay a nominal consideration gives rise to an implied promise to pay which can be enforced by the other party.  The government attempts to distinguish Smith on the ground that the instant case involves an intra-family transaction while in Smith the Georgia Court was confronted with an arm's-length agreement struck by unrelated individuals.  We can discern no basis for such a distinction under state law.  Related individuals are free to enter into binding contracts, and we have found no Georgia cases holding that different rules govern the validity and enforceability of a contract where related individuals are involved.  Here the option agreement was formalized in writing and signed by both parties.  Under Georgia law, the recitation of nominal consideration having been paid by the optionee is sufficient to bind the optionor.15


30
Notwithstanding our rejection of the government's legal position that a grant of an option by a closely held corporation to a shareholder for nominal consideration cannot transfer a property interest, we concede that the factors discussed by the government raise doubts concerning the district court's factual characterization of the transaction.


31
Nonetheless, there is other evidence in the record which supports the district court's findings and conclusions.  Under the standard applied by this Court in Hines v. United States, supra, the critical factual question is whether Corporation "actively participated in the transaction that produced the income to be imputed."  477 F.2d at 1069 (emphasis supplied).  Application of this standard in the case at bar is complicated by the fact that both Son and Corporation had interests in the property.  In the more typical situation, such as that presented in Hines, the entire property is transferred to the shareholder.  In such a case, any participation by the corporation in negotiating the sale of the property after that property is distributed to the shareholder evidences a sale by the corporation, rather than the shareholder.  Here, however, Corporation retained a one-half interest in the property.  It is absurd to suggest that income may be imputed to the corporation simply because it negotiated with third parties concerning this disposition Of its own interest In the property.  Instead, the crucial question becomes whether the Corporation "actively participated" in the sale of Son's share of the property.  This is a question of fact, and proper deference must be given to the findings of the district court.  The district court found in this regard that Father negotiated with Pope & Carter "on behalf of the Corporation" and that Son negotiated "on his own behalf."  See footnote 13 Supra.  This finding is itself supported by the record and is further supported by two subsidiary findings indicating the reality of Son's interest in the property.


32
The court found that at the time the option was granted, Father and Son intended to use the property themselves "for a motel."  This finding, supported by evidence in the record, indicates that no sale of the property was contemplated when Son received the property interest reflected by the option.  This, in turn, supports the conclusion that the option was not merely a subterfuge designed to conceal Corporation's subsequent sale of the entire property, but instead was intended to pass an interest to Son which Son, and not Corporation, later disposed of in the sale to Pope & Carter.


33
The court's determination that Son, rather than Corporation, negotiated with respect to Son's interest in the property is further supported by evidence that Son was personally involved to a substantial extent in the development activity which led to the increased value of the properties.  The district court found that these efforts were attributable to Son's belief that he had an interest in the property.16  The fact that Son had previously treated the option as constituting a personal property interest and had relied on this personal interest in developing the Piedmont-Old Ivy tracts strongly suggests that when Son later participated in the negotiations with Pope & Carter, he also did so in his own behalf.  The prior treatment of a transaction by the parties is a relevant consideration, which in this case, supports the finding that Son, and not Corporation, negotiated with Pope & Carter with respect to Son's interest in the property.


34
In sum, we are not persuaded that the transactions at issue must necessarily be characterized as a sham, as less than Bona fide, or as, "in substance," a sale by Corporation.  There was evidence in the record to support the findings that Son received his option interests before a sale was contemplated, that the option was treated by all the parties as a meaningful property interest, and that the option was the impetus for Son's personal efforts which significantly contributed to the appreciation in value of the property.  These findings, plus other evidence in the record, supports the findings that Son, not Father, negotiated with Pope & Carter in his own behalf with respect to the sale of Son's interest in the property and that Corporation did not actively participate in the sale of Son's interest.  While perhaps we might have characterized these transactions differently had we been responsible for the initial factual determination, in our role as an appellate court we may not impinge on the district court's fact-finding prerogatives.  The factors outlined above provide a sufficient basis for the court's conclusion that the sale of Son's interest in the property was not the sale of Corporation.  Accordingly, we affirm the court's decision not to impute income from that sale to Corporation under the Court Holding rationale.


35
We wish to make clear that we have not ignored the government's argument that this decision will enable closely held corporations to avoid Court Holding by granting options to their shareholders on every piece of corporate property, thereby avoiding corporate tax if the property is later sold.  This argument, however, does not persuade us that the result urged by the government is required in this case.  In this area of tax law, each case will necessarily turn on its own particular facts.  Evidence that a corporation has distributed hundreds of options to its shareholders would clearly be relevant to the district court's evaluation of an option transaction before it.  We emphasize that where the district court correctly applies the proper legal standard, the characterization of a transaction as, in substance, a sale by the corporation or a sale by the shareholder rests on findings of fact which are within the province of the district court.  The district court's determinations must be accepted on appeal where the factual findings are not clearly erroneous.  To reiterate, "(i)t is for the trial court, upon consideration of the entire transaction, to determine the factual category in which a particular transaction belongs."  United States v. Cumberland Public Service Co.,  supra, 70 S.Ct. at 282-83.  Nothing in today's opinion is meant to preclude the trial court from imputing income to a corporation where the record indicates that, in reality, the option at issue is merely a sham device for transmogrifying what is truly a corporate sale into a sale nominally made by the shareholders.


36
At a more fundamental level, the government's argument fails to recognize the limited scope of the Court Holding doctrine.  The Supreme Court in Cumberland affirmed the factfinder's characterization of the transaction at issue even though that transaction was designed solely to avoid double taxation of corporate gains.  In Hines v. United States, supra, we held that income need not be imputed even though the transfer was made "in anticipation of a sale by the shareholders, and . . .  with no valid business purpose aside from motives of tax avoidance."  477 F.2d at 1069, 1070.  As the Supreme Court stated in Cumberland :


37
Congress having determined that different tax consequences shall flow from different methods by which the shareholders of a closely held corporation may dispose of corporation property, we accept its mandate.


38
70 S.Ct. at 282.


39
Thus where corporate property is distributed to a shareholder pursuant to a valid option, and the sale of that property is, in reality, negotiated and consummated by the shareholder rather than by the corporation, the courts are not permitted to impute the income from that sale to the corporation.  Just as we may not inoculate transactions infected by the Court Holding selling virus, we may not allow that virus to reach epidemic proportions in response to the government's lamentations that its coffers are ailing and ill-nourished.  Such


40
decisions are best left to Congress. III. The Option:


41
Arm's-Length Transaction or Constructive Dividend?


42
Our conclusion that income from the sale of Son's interest in the Piedmont-Old Ivy property is not imputable to Corporation under Court Holding requires us to examine the government's alternative theory that the ascertainable value of property conferred by Corporation on Son without adequate consideration is taxable to Father as a constructive dividend.17  The district court substantially agreed with this theory and held that Father received a constructive dividend when Corporation granted the option to Son in 1966 and amended it in 1967.  However, finding that the value of the option was not ascertainable in 1966 or 1967, the court deferred recognition of the dividend and liability for the tax until Son exercised his option in 1968.  The court then valued the option with reference to the consideration paid by Pope & Carter for monthly extensions of its option.


43
Our review of the court's holding involves several district inquiries.  In subsection III(A) we discuss why, as a general matter, the district court was correct in refusing to assume at once that a transaction between a corporation and the sole shareholder's son was an arm's-length transaction.  We then consider in subsection III(B) whether constructive dividend treatment was warranted in this case.  Finally, in subsection III(C) we examine the district court's valuation of the constructive dividend.


44
We note at the outset that our journey through the constructive dividend area of tax law is a difficult one, often with no clear precedents to guide our way.  In seeking to divine congressional intent, we must view the Code as a coherent whole, gleaning whatever rules and policies it may offer for deciding the issues before us.  We attack these issues with a full arsenal of judicial weapons, including our own precedents, the Treasury Regulations, the Code sections which apply directly and those which indicate congressional purpose by analogy.


45
A. Judicial Scrutiny of Transactions Between Closely Held Corporations and Their Shareholders: A General Discussion


46
We begin by considering taxpayers' contention that the option to Son was granted by Corporation at a fair price in an arm's-length transaction.  According to taxpayers, no tax consequences should attach either to the grant or to the exercise of the option.  In taxpayers' view, Son's option should be treated no differently than the option granted to Pope & Carter.  We conclude that this argument is untenable.  In order to elucidate our views on the oft-perplexing problem of the conferral of benefits on a controlling shareholder by a closely held corporation, we begin with first principles.


47
Distributions of "property" made by a corporation to a shareholder with respect to its stock are dividends to the extent of the corporation's current and accumulated earnings and profits, 26 U.S.C. §§ 301(a)(c),316(a),18 and must included by the shareholder in gross income.  26 U.S.C. §§ 301(a), 301(c) (1).19


48
For purposes of corporate distributions, the Code defines "property" as


49
money, securities, and other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).


50
26 U.S.C. § 317(a).  In accordance with this broad definition of property, dividends may be "in cash or in kind, and may also result when the corporation makes a 'bargain sale' of its property to the shareholder at less than fair market value.  When there is a 'bargain sale,' the shareholder receives a dividend in the amount of the difference between the fair market value and the price paid for the corporate property . . . ."  Green v. United States, 460 F.2d 412, 419 (5th Cir. 1972).  As the Supreme Court has recognized, "a sale, if for substantially less than the value of the property sold, may be as effective a means of distributing profits among stockholders as the formal declaration of a dividend."  Palmer v. Commissioner, 302 U.S. 63, 58 S.Ct. 67, 82 L.Ed. 50 (1937).  No such formal declaration is required for a shareholder to be charged with a constructive dividend.  Crosby v. United States, 496 F.2d 1384 (5th Cir. 1974).


51
Two other guiding principles require mention at this stage.  It is clear that the intent of the parties does not govern the characterization of a distribution.  Instead, courts have looked to the economic Effect of the transaction at issue in determining the existence of a dividend.  See id; Loftin and Woodard, Inc. v. United States, 577 F.2d 1206, at 1214 (5th Cir. 1978).  It is also well settled that a dividend does not escape taxation "simply because it fails to pass through the hands of the particular taxpayer when . . .  the dividend is diverted at the behest of the shareholder into the hands of others."  Green v. United States, supra, 460 F.2d at 419, Quoting Sammons v. United States, 433 F.2d 728, 730 (5th Cir. 1970), Cert. denied, 402 U.S. 945, 91 S.Ct. 1621, 29 L.Ed.2d 113 (1971).


52
In the Green case, Supra, this court reviewed a district court's judgment that, as a matter of law, a sale of property by a closely held corporation to the children of the corporation's controlling shareholder did not constitute a constructive dividend.  The government had contended that the property was sold to the children at less than fair market value.  We reversed the district court, holding that if the corporation did in fact consummate a transaction with favorable consequences for a controlling shareholder's immediate family, "only in the most extraordinary circumstances" would it be possible to conclude that the shareholder had not heavily influenced the corporation's decision.  For that reason, we held that the sale was a constructive dividend.  460 F.2d at 420-21.


53
Likewise, in Crosby v. United States, 496 F.2d 1384 (5th Cir. 1974), this court closely examined a transaction to determine whether constructive dividend treatment was warranted.  There the corporation made improvements to its stockholder's land after the stockholder had conveyed the land by deed to the corporation.  The court determined, however, that the only property right which the corporation had acquired through the transfer of the deed was the right to sell the property.  An investigation of the substance of this transaction convinced the court that the underlying purpose of many of the improvements was to benefit the stockholder.  We therefore remanded the case for a determination of "which improvements were for a corporate purpose and which were not."  Those that were not, we said, were to be treated as constructive dividends.  As we recently remarked in Loftin and Woodard, Inc., supra, at 1216,


54
"(h)ad the Crosby court merely accepted this transaction at face value, it would have overlooked the existence of an economic benefit conferred by the corporation without expectation of repayment and, as a result, overlooked a potential constructive dividend."


55
This comment is particularly apposite to the instant case.  See also Commissioner v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 1521, 20 L.Ed.2d 448 (1968); Hardin v. United States, 461 F.2d 865 (5th Cir. 1972); Honigman v. Commissioner, 466 F.2d 69 (6th Cir. 1972).  See generally Commissioner v. LoBue, 351 U.S. 243, 76 S.Ct. 800, 803, 100 L.Ed. 1142 (1956) (sale of corporation's own stock to employee at a bargain price pursuant to an employee stock option did not constitute an arm's-length transaction and employee realized taxable gain when he purchased the stock).


56
These expansive principles governing the treatment of constructive dividends reflect an awareness by Congress and the courts of the ingenious methods which have been devised by owners of closely held corporations trying to escape taxes at the corporate or shareholder level.  "Instances of 'constructive' or 'disguised' distributions are commonly encountered in the context of closely held corporations whose dealings with their stockholders are, more often than not, characterized by informality."  B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders 7-24 (3d ed. 1971).  As a consequence, courts have generally examined dealings between a closely held corporation and its shareholders or relatives of shareholders with a jaundiced eye and microscopic vision.  Such transactions are simply not entitled to the presumption that they are conducted at arm's length.  Indeed, they call for special scrutiny.  We suggest that the metaphor of a corporation and its sole shareholder walking arm-in-arm is more descriptive of reality than the vision of the corporation and shareholder holding each other apart at arm's length.20


57
The district court, then, was properly skeptical when taxpayers insisted that Corporation and Son dealt at arm's length.  Both law and common sense require us not to presume that the option granted to Son was entitled to the same treatment as, for example, the Pope & Carter option, which all concede was negotiated at arm's length.  We now proceed to an examination of Son's option to determine whether the district court properly held Father taxable on a constructive dividend in the circumstances of this case.


58
B. The Grant of the Option as a Constructive Dividend


59
Our inquiry is in two parts.  First, we must focus on whether, in fact, the grant of the option conferred a benefit on Son by distributing valuable rights without consideration.21  If we determine that the option conferred such a benefit, we must then examine whether the resulting corporate distribution constituted a constructive dividend to Father.  "(W)hether or not a corporate distribution is a dividend or something else, such as a gift, compensation for services, repayment of a loan . . .  or payment for property purchased, presents a question of fact to be determined in each case.  Hardin v. United States, 461 F.2d 865, 872 (5th Cir. 1972), Quoting Lengsfield v. Commissioner, 241 F.2d 508, 510 (5th Cir. 1957).


60
1. The Option: Valuable Rights or Fair Bargain?


61
Our initial task of valuing the option to determine whether the corporation distributed valuable rights to Son is greatly complicated by the unsettled state of the law in this area.  Neither the Code nor the applicable case law provides clear guidance.  Taxpayers maintain that under the Supreme Court's decision in Palmer v. Commissioner, 302 U.S. 63, 58 S.Ct. 67, 82 L.Ed. 50 (1937), there is no dividend if the exercise price of the option represents the fair market value of the underlying property at the time the option is issued, even if the value of the underlying property has appreciated greatly by the time the option is exercised.  Taxpayers argue that the $100,000 exercise price of the option on the combined properties was a reasonable valuation of the fair market value of those properties at the time the option was granted to Son.22  Thus, according to taxpayers, no valuable rights constituting a dividend were distributed by Corporation.


62
The government responds first that taxpayers' argument rests on an erroneous reading of Palmer, and, second, that the 1954 Code has modified this aspect of the Palmer decision in any event.  We agree with the government that the position contended for by taxpayers is justified neither by good sense23 nor by the applicable case law.


63
The Supreme Court's decision in Palmer has been a controversial one.  In that case, a corporation distributed options, exercisable for 15 days, to its shareholders, entitling those shareholders to purchase from the corporation portfolio shares in a second corporation.  On the date distribution of the option was authorized, the exercise price of the options equalled the market value of the portfolio shares.  By the time the options were issued, eight days later, the market value of the portfolio shares had increased considerably.


64
The Court held first that under the Revenue Act of 1928, a shareholder who is granted an option to purchase portfolio shares is not subject to income tax on the receipt of the option, even though the option itself is valuable.  "The mere issue of rights to subscribe and their receipt by stockholders, is not a dividend.  No distribution of corporate assets or diminution of the net worth of the corporation results in any practical sense."  58 S.Ct. at 70.  The Court then considered whether the shareholders would be taxable upon exercise of their option rights when a spread developed between the option price and the market value of the shares.  The Court held that the exercise of these rights does not result in a dividend if the circumstances demonstrate "that distribution of corporate assets, effected by the sale, was not intended to be a means of distributing earnings, and that the price when fixed represented the fair market value of the property to be distributed."  Id. at 71.  Such a distribution "is not converted into a dividend by the mere circumstance that later, at the time of their delivery to the stockholders, (the assets) have a higher value."  Id.


65
We recognize that this language appears to support taxpayers' contention that because the exercise price of Son's option equalled the fair market value of the property when the option was granted, See footnote 22, Supra, no dividend should result from either the grant or exercise of the option.  The continuing vitality of this aspect of the Palmer decision under the 1954 Code, however, is far from self-evident.  The commentators generally have been critical of the reasoning of Palmer and most have concluded that a different result is mandated by the 1954 Code.  See e. g., Carlson, Taxation of "Taxable" Stock Rights: The Strange Persistence of Palmer v. Commissioner, 23 Tax.L.Rev. 129 (1968); Whiteside, Income Tax Consequences of Distributions of Stock Rights to Shareholders, 66 Yale L.J. 1016, 1026-27 (1957); Comment, 51 Calif.L.Rev. 146, 150-51 (1963).  See also, Rev.Rul. 70-521 (A distribution by a corporation of short-term rights to acquire stock in another corporation is a section 301 distribution within the meaning of section 317.  The value of the dividend equals the fair market value of the rights, rather than the spread between the value of the stock and the exercise price).  We need not resolve this question, however, because a closer reading of Palmer reveals that the Court's holding in that case does not reach the transaction now before us.  In Palmer the stock rights were extended to shareholders of a publicly held corporation and were exercisable for only fifteen days.  The option price, when fixed eight days before the rights were issued, reasonably reflected the stock's current market value.  As the Court observed, this was the "only feasible method by which a corporation of large membership can effect a sale of its assets to stockholders."  Id. at 71.


66
A close examination of the language used throughout the Palmer opinion reveals that the Court viewed the issuance of stock rights, exercisable for only fifteen days, as merely a convenient method of selling corporate property to its shareholders at arm's length.  For example, the Court analogized the transaction to an ordinary sale by a vendor:


67
When the corporation has committed itself to a sale of its assets to stockholders at present market value, the effect on its balance sheet is the same as in the case of other vendors who in various ways assume the risk of rising prices pending the consummation of the sale.


68
Id.  At another point in the opinion the Court commented that "(a)ny vendor who offers property for sale at a named price similarly carries the burden of risk that the property may increase in value between offer and acceptance.  . . .  It is an inseparable incident of every sale except those in which conditions admit of payment for the property simultaneously with its tender for sale, a procedure which may not be available to a corporation seeking to sell its property to stockholders."  Id.


69
This characterization of the stock rights at issue in Palmer as merely a reasonable method for selling portfolio shares, with neither the purpose nor the effect of distributing profits, distinguishes Palmer from the case at bar.  Here the option remained open for over two years.  It was contemplated from the beginning of the transaction that rezoning of the property, which would substantially increase the value of the land, might be obtained.  Indeed, the rezoning efforts of Father, Son, and Corporation permeated the entire transaction.  Son's option cannot be compared with the stock rights in Palmer which were designed merely to effectuate an immediate sale of the property.  As taxpayers admit in their brief, the obvious reason for granting the option at issue here was to provide Son an opportunity to participate in a real estate venture and reap the benefit of any appreciation in the property.  Brief for Appellees-Cross Appellants at 22.  The potential for appreciation of the underlying property during the extended option period made the option a valuable commodity, the grant of which was expected to confer a benefit on Son.


70
Another pre-1954 Code Supreme Court decision in a closely analogous area of the law supports our reading of Palmer.  In Commissioner v. Smith, 324 U.S. 177, 65 S.Ct. 591, 89 L.Ed. 830 (1945), a corporation granted an employee an option to purchase certain portfolio shares of stock in another corporation.  The exercise price equalled the value of the underlying shares at the time of grant, but the option was not exercised until four years later, when the value of the stock greatly exceeded the exercise price.  The Court held that the employee was properly taxed on the spread between the value of the stock at exercise and the exercise price, despite the fact that no such spread existed at the time the option was granted.  While the precise question before the Court was whether the appreciation in the stock constituted compensation for personal services of the employee, taxable as income under § 22(a) of the Revenue Act of 1938, the Court's reasoning is instructive in the constructive dividend area.  First, the Court noted that the parties "anticipated" an increase in the market value of the stock.  65 S.Ct. at 592.  The Court then stated: "the compensation for (the employee's) services, which the parties contemplated, plainly was not confined to the mere delivery to (the employee) of an option Of no present value, but included the compensation obtainable by the exercise of the option given for that purpose."  Id. at 593 (emphasis supplied).


71
In both Smith and the case at bar, a corporation granted an option which remained open for an extended period of time.  In both cases appreciation in the value of the underlying property was contemplated.  Unlike the transaction in Palmer, no immediate sales of the optioned properties were intended.  The absence of these features in Palmer may have made it reasonable to value the constructive dividend in that case at the spread between the value of the underlying property and the exercise price of the option when the option was issued.  See footnote 26 Infra.  But here the parties contemplated both that the optioned property would greatly appreciate in value if favorable zoning were obtained and that the exercise of the option would await such appreciation.  Under the circumstances, the Court's reasoning in Smith requires that we consider the duration of the option period and the potential for increase in value of the underlying property along with the exercise price in determining the appropriate tax treatment of the option.


72
Our emphasis on the extended duration of the option and on the contemplated appreciation in value of the underlying property is fully consistent with the applicable provisions of the 1954 Internal Revenue Code, which, of course, govern the transaction at issue.  Unlike the prior revenue laws, subchapter C of the 1954 Code contains elaborate and specific rules governing corporate distributions.  As we have previously discussed, a distribution of "property" made by a corporation to a shareholder with respect to its stock constitutes a dividend.  26 U.S.C. §§ 301(a)(c),316(a).  The definition of property in section 317(a) is extremely broad; it includes any property except the distributing corporation's own stock and rights to purchase such stock:


73
(T)he term "property" means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).


74
26 U.S.C. § 317(a).  This express exclusion of rights to acquire stock in the distributing corporation strongly suggests that these stock rights would otherwise be included in the definition of property.  This in turn further strengthens the argument that rights or options to acquire any other corporate asset constitutes "property" within the meaning of section 317(a).24  We conclude that under the 1954 Code, a distribution of an option to acquire corporate property constitutes a distribution of property within the meaning of section 301.  This distribution is a dividend if the corporation has sufficient earnings and profits.  26 U.S.C. § 316(a).  See Commissioner v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 1521, 20 L.Ed.2d 448 (1968).


75
The 1954 Code also specifies the method for determining the value of a distribution.  Under section 301(b)(1)(A), the amount of the distribution is measured by the Fair market value of the property received.  Thus, in the case at bar the amount of the distribution should be measured by the Fair market value of the option, rather than by the spread between the exercise price and the value of the underlying property at the time of grant.25  See Rev.Rul. 70-521.  While that spread in some cases may approximate the fair market value of the option,26 here the duration of the option period and the likelihood of obtaining favorable rezoning must also be considered in determining the option's fair market value.  See Treasury Regulation 1.421-6, discussed Infra.  Thus the determination of whether the grant of the option conferred a benefit on Son is governed by the value of the option, rather than by the spread between the exercise price and the value of the underlying property.


76
Applying this standard, we are in complete agreement with the district court's finding that the rights granted under the option were of great value to Son.  The option entitled Son to reap the benefits of the contemplated rezoning without incurring any of the risks associated with the real estate venture.  He paid no consideration for his rights.  If, during the two and one half year option period the properties appreciated in value, Son would realize a gain.  If the value of the property decreased or remained the same, Son would be no worse off.  Son was truly in a "heads I win, tails I don't lose" position.  This "option privilege" represented valuable property to Son.27  As Treasury Regulation 1.421-6, which addresses an analogous question in the employee stock option area, explains:


77
(I)rrespective of whether there is a right to make an immediate bargain purchase of the property subject to the option, the fair market value of the option includes the value of the option privilege.  The option privilege is the opportunity to benefit at any time during the period the option may be exercised from any appreciation during such period in the value of the property subject to the option without risking any capital.


78
Any doubts that Corporation distributed valuable rights to Son when it granted the option are dispelled by comparing Son's option with that received by Pope & Carter.  Pope & Carter agreed to pay substantial amounts to keep its option open and, in addition, obligated itself to devote reasonable time and effort to obtaining favorable rezoning.  In return it received the right to acquire the property for $500,000, a price far in excess of the fair market value of the property at the time the option was granted.  Son's option, on the other hand, remained in effect for a longer period, imposed no obligations on Son, and allowed him to purchase a one-half interest in the property for only $100,000 plus 51/2 percent interest.  Even if we ignore the fact that the amendment to Son's option, which extended the exercise period for an additional two years without increasing the exercise price, was granted a mere thirteen days before the grant of the Pope & Carter option, See footnote 22 Supra, it is apparent that in granting the option, Corporation conferred a benefit on Son by distributing valuable rights.


79
2. The Corporate Distribution: a Constructive Dividend?


80
Having concluded that Corporation distributed valuable rights to Son, we can easily dispose of taxpayers' contention that the grant of the option should not result in a constructive dividend to Father.  Whether a corporate distribution is a dividend presents a question of fact to be determined in each case.  Hardin v. United States, supra, 461 F.2d at 872.  A crucial consideration in characterizing a distribution is whether it primarily served a corporate purpose or a shareholder purpose.28  The tasks of weighing the evidence, drawing inferences from the facts, And choosing between conflicting inferences are, of course, part of the function of the district court.  We must not disturb that determination unless we are convinced that there is "clear error" in the district court's findings.  Loftin and Woodard, Inc. v. United States, supra, at 1214; Honigman v. Commissioner, 466 F.2d 69, 74 (6th Cir. 1972).  See Lengsfield v. Commissioner, 241 F.2d 508, 510 (5th Cir. 1957).29


81
Here the district court found that the distribution to Son was made " by virtue of Father's position as sole stockholder of the corporate plaintiff" and therefore resulted in a dividend to Father.  The record does not require the contrary finding that a corporate purpose was served by giving Son an option to purchase property at Corporation's cost when all parties recognized that the value of the property would substantially appreciate if favorable rezoning were obtained.  Taxpayers maintain that the option was granted because of Corporation's interest in obtaining the benefit of Son's services.  The evidence, however, more than adequately supports the conclusion that the grant of the option primarily served the personal interests of Father in his shareholder capacity.  Indeed, taxpayers admit that the option was granted to satisfy the moral obligation of Father to compensate Son for taking advantage of a business opportunity Father had personally discouraged Son from pursuing.  Taxpayers' Brief at 7.  No legitimate business purpose is served by the distribution of funds to satisfy the personal or moral responsibilities of a shareholder.  Hardin v. United States, supra, 461 F.2d at 872-37.


82
Essentially taxpayers urge this court to draw inferences from the evidence different from those drawn by the district court.  This we decline to do under the record in this case.  As we held in United States v. Green,supra, where a corporation consummates a transaction with favorable consequences for a controlling shareholder's immediate family, "only in the most extraordinary circumstances" would it be possible to conclude that the shareholder had not exercised "substantial influence" in causing a diversion of corporate assets, thereby justifying constructive dividend treatment.  No such circumstances are present here.  460 F.2d at 420-21.


83
Since we hold that there is no clear error in the findings of the district court, we affirm the district court's conclusion that Father received a constructive dividend from the grant by Corporation to Son of the option on the Piedmont-Old Ivy property.

C. Valuing the Dividend

84
The final issue presented by this appeal is whether the district court properly valued Father's constructive dividend.  In particular, questions have been raised concerning the district court's use of the consideration paid by Pope & Carter in valuing Son's option.  To resolve this issue, we must first examine whether the dividend occurred upon the grant of the option or upon its exercise by Son.  If we determine that Grant of the option constituted a dividend, we must then consider both the district court's finding that the option had no ascertainable value at the time of grant and the Court's subsequent valuation of the option at the time of exercise in 1968.  If, on the other hand, the dividend arose only upon Son's Exercise of the option, we need only consider the proper valuation of the option at that time.


85
Prior to the 1954 Code, it was settled that the Grant of an option to purchase property of a corporation did not result in a dividend.  "(D)istribution of corporate property could take place only on (an option's) exercise" because "(n)o distribution of corporate assets or diminution of the net worth of the corporation results in any practical sense" when an option is granted.  Palmer v. Commissioner, supra, 58 S.Ct. at 70.  The adoption of the 1954 Code has prompted critical reexamination of this aspect of the Palmer decision.  The commentators generally have concluded that under the Code provisions discussed in subsections III(B) Supra, the taxable event occurs when valuable rights are first granted to the shareholder.  See Carlson, Taxation of "Taxable" Stock Rights: The Strange Persistence of Palmer v. Commissioner, 23 Tax L.J. 129, 140-45 (1968); Whiteside, Income Tax Consequences of Distributions of Stock Rights to Shareholders, 66 Yale L.J. 1016, 1031 (1957); Comment, 51 Calif.L.Rev. 146, 150-51 (1963).  They reason that because an option is "property" within the meaning of section 317(a), a distribution of the option is taxable under section 301 upon the option's issuance by the Corporation.  See also Rev.Rul. 70-521.  Nonetheless, the continuing validity of the Palmer principle that no dividend occurs until an option is exercised has not been definitively settled by the courts.  Indeed, in Commissioner v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 20 L.Ed.2d 448 (1968), the Supreme Court explicitly left open the question "(w)hether the actual dividend occurs at the moment when valuable rights are distributed or at the moment when their value is realized through sale or exercise . . .."  88 S.Ct. at 1521.30


86
The litigants here agree that under the 1954 Code, the taxable event is the grant of an option, not its exercise.  The government qualifies its position by maintaining that if the value of the option is unascertainable at the time of grant, under the "open transaction" doctrine of Burnet v. Logan, supra, its valuation is deferred until the option is exercised.  Because the result in the case at bar would be the same whether we viewed the dividend as occurring at the time of grant or at the time of exercise,31 we shall assume, without deciding, that the dividend occurs at the time of grant.32


87
The district court also assumed that the dividend to Father occurred when the option was granted to Son.  The court found, however, that the option had no ascertainable value at the time of grant33 and therefore applied the open transaction doctrine of Burnet v. Logan, 283 U.S. 404, 51 S.Ct. 550, 75 L.Ed. 1143 (1931).  Taxpayers contend that the open transaction doctrine does not apply to the instant case and that any constructive dividend received by Father occurred either upon the grant of the option in 1966 or upon its amendment in 1967.  Because neither of these tax years is before us in this suit, taxpayers conclude that any constructive dividend should go untaxed.


88
Our examination of the record convinces us that the district court properly applied the open transaction doctrine.  When taxable property is received in exchange for other property or in a corporate distribution, the fair market value of the property received usually can be ascertained and the amount of the distribution or the gain from the exchange can be computed and taxed at that time.  See Burnet v. Logan, supra; Estate of Meade v. Commissioner, 489 F.2d 161, 163 (5th Cir.), Cert. denied, 419 U.S. 882, 95 S.Ct. 147, 42 L.Ed.2d 122 (1974); Dennis v. Commissioner, 473 F.2d 274, 285 (5th Cir. 1973).  Treasury Regulation 1.453-6 states that "(o)nly in rare and extraordinary cases does property have no fair market value."


89
In those rare circumstances in which no fair market value of the property can be ascertained, however, it is impossible to compute the tax.  As a result, the courts have found it necessary to treat the transaction as "open" until the value of the property can be ascertained.  See Burnet v. Logan,supra; Estate of Meade, supra, 489 F.2d at 163; Dennis, supra, 473 F.2d at 285.  Most cases applying the doctrine involve a sale or exchange of property.  See, e. g., Burnet v. Logan, supra.  This court has used the open transaction doctrine in taxing a corporate distribution upon liquidation.  See Estate of Meade, supra.  While we have discovered no cases involving a corporate dividend, we see no reason for treating a dividend of unascertainable value differently from the distribution of an antitrust claim upon liquidation in Estate of Meade or to the receipt of mineral rights in Burnet v. Logan.  In all these cases it is equally appropriate to defer taxation until the correct amounts can be accurately determined.  Moreover, the open transaction doctrine has been applied by Treasury Regulation 1.421-6 to nonstatutory employee options to purchase stock or other property of the employer.  Such an option is taxable upon grant only if it has a "readily ascertainable fair market value" when granted.  Otherwise, it is taxable at exercise.  Notably, the regulation provides that "(a)lthough options may have a value at the time they are granted, that value is ordinarily not readily ascertainable unless the option is actively traded on an established market."34


90
In this tax refund suit, the burden is on the taxpayer to establish that the option had an ascertainable fair market value at the time of grant.  See Crosby v. United States, 496 F.2d 1384, 1390 (5th Cir. 1974).  Taxpayers introduced evidence concerning the fair market value of the underlying Piedmont-Old Ivy property at the time of grant, but the record contains no evidence concerning the value of The option itself.  That value reflects not only the exercise price, but also the duration of the option period and the likelihood of obtaining favorable rezoning.  The record simply does not establish a basis for evaluating either of these factors.  As was the case in Burnet v. Logan, the value of the option was "contingent upon facts and circumstances not possible to foretell with anything like fair certainty."  51 S.Ct. at 552.  Under the circumstances, taxpayers failed to satisfy their burden of demonstrating an ascertainable fair market value for the option at the time it was issued, and the district court's finding must be affirmed.


91
Since there was no ascertainable value, the district court correctly held that the recognition of dividend income by Father should be deferred under Burnet v. Logan until the option was exercised and its value could be ascertained.  The court nonetheless erred in valuing the dividend with reference to the monetary consideration paid by Pope & Carter for its option.


92
The court concluded that since Pope & Carter was willing to pay $3,000 per month to extend its option, Son's option to purchase a one-half interest in the property was worth $1,500 per month during the period that both the Piedmont and Old Ivy Properties were subject to the option, and a pro rata amount, $1,312.50 per month, during the period in which the option covered only the Piedmont property.  This valuation assumes that Pope & Carter and Son received similar options.  Yet the record leaves no doubt that Son was granted a significantly more valuable option.  Son's option had an exercise price of $100,000, while the corresponding exercise price in the Pope & Carter option for a one-half interest in the property was $250,000.  Thus at the time Son exercised his rights, Son's option was worth substantially more than that of Pope & Carter.  Furthermore, the option granted to Pope & Carter required it to expend reasonable time and effort to obtain favorable zoning.  Son's option required no such activity, See footnote 21 Supra, and thus was also more valuable for this reason.  Neither of these factors was taken into account in the district court's valuation of the option.


93
On remand the court should be guided by the Supreme Court's decision in Commissioner v. Gordon, supra.  There the Court assumed, without deciding, that the distribution to shareholders of an option to purchase stock in another company resulted in a dividend at the time of exercise.  See footnote 25 Supra.  The Court then held that the dividend should be valued "in the amount of the difference between $16 per share (the exercise price) and the fair market value of a share . . .  at the moment the rights were exercised."  88 S.Ct. at 1525 (1968).  The Court thus recognized that at any moment, an option is worth at least the difference between the present market value of the underlying property and the exercise price of the option.  Treasury Regulation 1.421-6(d) uses this method to value non-statutory employee stock options at the time of exercise.


94
Thus in the instant case the option should be valued by subtracting the exercise price of approximately $100,000 from the fair market value of the underlying property when the option was exercised on December 6, 1968.  The district court determined that the market value of the Piedmont-Old Ivy property was at least $500,000 when Pope & Carter exercised its option on December 27.  Because the rezoning application was approved before Son exercised his option on December 6, it is likely that most, if not all, of this appreciation had occurred by the time Son exercised the option.  Nonetheless, it is for the factfinder, and not the reviewing court, to determine the precise value of a one-half interest in the properties on December 6 and the resulting value of the option upon its exercise.  We therefore remand the case to the district court for a redetermination of the value of the constructive dividend taxable to Father.35IV. Conclusion


95
The concepts of imputed income and constructive dividend have been developed to prevent taxpayers from clothing their activities in tax-repellant garb.  Both doctrines require courts to look behind the superficial or formal nature of a transaction.  Application of these concepts in complicated tax cases involves the difficult task of characterizing elusive transactions.


96
The appellate courts must, of course, articulate and elaborate the applicable law.  But in dealing with the questions presented in this case, it is clear that an understanding of the factual situation and the real nature of the transaction are of primary importance.  In this area a district judge is likely to have superior insights.  Thus in allocating judicial responsibilities, Congress has entrusted this fact-finding process to the district courts, subject, of course, to appellate review.  Here the district court found that Son, rather than Corporation, negotiated and consummated the sale of Son's interest in the Piedmont-Old Ivy property to Pope & Carter and therefore concluded that income from this sale should not be imputed to Corporation.  The court also found that valuable rights were distributed by Corporation to Son without business purposes because of Father's opposition as the controlling shareholder of Corporation and therefore concluded that Father received a constructive dividend from Corporation.  These factual determinations are supported by the record, and the court's ultimate conclusions rest on a correct application of the controlling law.  These determinations are therefore affirmed.  The court, however, failed to apply the proper standard for determining the value of Son's option at the time of exercise and therefore improperly computed the amount of Father's constructive dividend.  Accordingly, this portion of the case must be remanded for further proceedings consistent with this opinion.  The judgment of the district court is AFFIRMED IN PART, REVERSED IN PART, and REMANDED IN PART.



1
 Clara S. Baumer and Gail A. Baumer are parties in these proceedings solely by virtue of having filed joint returns for the years in question with their respective husbands, Father and Son


2
 Father testified that his advice was not based on the investment value of the particular property under consideration; rather, (1) he felt Son had not sufficiently recovered from his wife's death in January, 1965 to make such a significant investment decision; (2) he doubted the financial capacity of Son's partner; and (3) he was hesitant to advise Son to make such a purchase when Son was contemplating a possible change in law firms


3
 The record indicates that the five and one-half percent purchase price escalation factor reflected the interest rate then being paid by Corporation on its borrowed funds


4
 Pope & Carter originally requested "C-1" (commercial) zoning.  This request was denied.  A subsequent application for "O&I" (Office and institutional) zoning was approved with certain restrictions


5
 The Commissioner also determined that Son received a gift from Father in the amount of this dividend.  The Commissioner's assessment of gift tax liability against Father is the subject of separate litigation and is not before us on this appeal


6
 In its Conclusions of Law the district court stated:
The Court believes that the Pope & Carter option price of $3,000 per month furnishes the proper basis for such evaluation . . . .  (T)he value of the option (and of the corporate dividend and the gift) is $1,500 per month from August 18, 1966 (the date on which the option was amended to include the Old Ivy property), to closing, and seven-eighths of that amount from February 7, 1966, to August 18, 1966 (the period in which only the Piedmont property was subject to the option).


7
 The district court found that the fair market value of the property on December 27, 1968, the day Pope & Carter exercised its option, at least equalled the Pope & Carter exercise price of $500,000.  Son exercised his option 21 days earlier, on December 6, 1968


8
 The government also cites Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940); Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81 (1940); Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930), and other "assignment of income" cases in support of its position.  In each of those cases the transferor assigned a right to receive income while retaining the underlying property interest.  Here Corporation transferred a property interest, rather than an income interest, to Son.  Such a transfer is properly analyzed with reference to the Court Holding line of decisions


9
 If we accept the government's position that the entire gain on the sale of the Piedmont-Old Ivy property to Pope & Carter is attributable to Corporation, it would follow that the distribution of half of that gain to Son would constitute a constructive dividend to Father, the sole shareholder of the corporation.  See discussion of the taxation of constructive dividends in section III Infra


10
 Nothing in Section 311 of the Internal Revenue Code, 26 U.S.C. § 311, which provides that a corporation shall not recognize gain or loss on the "distribution of property," undercuts the theory of Court Holding.  See Hines v. United States, 477 F.2d 1063, 1068 (5th Cir. 1973).  Under the Court Holding doctrine, income is attributed to the corporation not because of the distribution, but because a sale nominally by the shareholders is found to be "in substance the sale of the corporation."  Court Holding, Supra, 65 S.Ct. at 708.  The corporation realizes gain on the sale, not on the distribution.  See B. Bittker & J. Eustice, Federal Income Taxation of Corporation and Shareholders 7-44 (3d ed. 1971)


11
 The court found that "Son and Father wanted to use the Piedmont Property for a motel" at the time the option to Son was granted.  Findings of Fact No. 26


12
 Finding of Fact No. 45


13
 "Negotiations were undertaken and participated in by Father, On behalf of the Corporation, Son, On his own behalf, and Pope & Carter, and an option agreement . . .  (was) executed . . ."  Finding of Fact No. 33 (emphasis supplied).  "At all times after mid-January, 1967, Pope & Carter knew of Son's right to an interest in the properties and negotiated and dealt with him either directly or through his Father with such knowledge and negotiated and dealt with Father either directly or through Son."  Finding of Fact No. 36.  "After the Son's purchase in December, 1968, Pope & Carter, Father and Son negotiated regarding further extensions on Pope & Carter's option."  Finding of Fact No. 42


14
 The district court made no specific finding that Corporation did not "actually participate" in the sale of Son's interest in the property to Pope & Carter.  Nor did the court's ultimate conclusions of law explicitly refer to the Court Holding issue.  Instead, the court stated that "(t)he Court finds defendant's other theories of taxation inapplicable to the factual situation presented in this case."  While more specific findings would be helpful to our review, we believe that the factual posture of this case, the findings outlined above, and the court's judgment taken together reveal that the court found that Corporation did not "actively participate" in the sale of Son's interest, and that this sale was not, in reality, "the sale of Corporation".  Court Holding, supra, 65 S.Ct. at 708.  Such a finding is fairly implicit in the court's rejection of the government's theory as inapplicable to the facts, and in its findings that the distribution of the option to Son occurred before a sale of the property was even contemplated and that Son negotiated with Pope & Carter in his own behalf.  In this regard, we note that the district court had before it briefs from both the Department of Justice and the taxpayers which discussed the applicable standards under Court Holding


15
 The government also relies on Helvering v. San Joaquin Fruit & Investment Co., 297 U.S. 496, 56 S.Ct. 569, 80 L.Ed. 824 (1936), for the proposition that under federal law, an option does not transfer a present interest in the option property.  We find such reliance misplaced in the circumstances of this case
The controlling statute in San Joaquin was Section 204(b) of the Revenue Act of 1924, which provided that
The basis for determining the gain or loss from the sale or other disposition of property Acquired before March 1, 1913, shall be (A) the cost of such property . . .  or (B) the fair market value of such property as of March 1, 1913, whichever is greater.
Taxpayer's predecessor had acquired an option on the property at issue prior to March 1, 1913, but did not exercise the option until 1916.  The fair market value of the property on March 1, 1913 was in excess of the exercise price.  Taxpayer therefore argued that the property was "acquired" at the grant of the option and that his basis in the property for purposes of computing gain on a subsequent sale was the fair market value in 1913 rather than the lower exercise price which reflected the cost he paid for the property in 1916.  The issue before the Court thus was whether property was "acquired," within the meaning of section 204(b) at the date the option on the property was granted or on the date the option was exercised.  The Court held that the property was not actually acquired until the option was exercised.  Thus the optionee's cost basis in the property was the exercise price and not the value of the land on the date the option was received.
We fail to see how the Court's determination in San Joaquin implies that the transfer of an option may not constitute interest in the property for purposes of determining the proper characterization of the transaction under Court Holding.  San Joaquin merely holds that an option holder does not acquire a sufficient interest in the underlying property to receive a basis in that property until the option is exercised.  This holding is fully consistent with a finding that significant interests in the underlying property may be transferred by an option.  In the instant case, neither Corporation nor Pope & Carter could have ignored Son's option in negotiating a sale of the Piedmont-Old Ivy tracts.  Pope & Carter knew of Son's interest and could only have purchased the properties subject to that interest.  Corporation was legally obligated to make a subsequent sale to Son upon the exercise of his option, and as a legal matter, Corporation couldn't control Son's exercise of the option.
We note that as a factual matter, it is possible that Corporation controlled the transaction entirely, with Son simply acting on behalf of Corporation.  The district court, however, found to the contrary.  Our holding that San Joaquin is inapplicable to the issue under consideration merely means that an option in property need not be ignored by the district courts in characterizing the transaction under Court Holding.  District courts, of course, are free to evaluate the Bona fides of an option and any subsequent sale of the underlying property by the option holder based on their own consideration of the facts.


16
 The government argues in this regard that Son was employed by Father during part of the period in which the option was in effect and would have participated in the development of the properties even if he had never been granted the option.  However, while Son may have been employed by other corporations owned by Father, there is no indication in the record that Son was ever employed by Seven Eighty-Eight Greenwood Avenue Corp. during the relevant period.  Furthermore, speculation concerning what Son would have done without the option is much less important than the fact that his activities were, in fact, prompted by his option interest in the property.  See Finding of Fact No. 26


17
 Had we imputed the entire gain from the sale of the Piedmont-Old Ivy property to Corporation, the distribution of half of that gain to Son would have constituted a constructive dividend to Father.  See footnote 9 Supra.  In this section we reach the government's alternative theory that even if no constructive dividend resulted from Corporation's distribution of the profits of the Pope & Carter sale to Son, a constructive dividend occurred when Corporation distributed the option to Son


18
 In the instant case, taxpayers do not contend that Corporation lacked sufficient earnings and profits to support the dividend assessed by the Commissioner.  Thus the option granted to Son represents a dividend to the extent that the other requirements of section 301 are met


19
 Corporate distributions in redemption of the corporation's own stock are governed by section 302


20
 The more commonly used image of the "corporate veil" may itself suggest that the nexus between the corporation and its shareholders is often more intimate than taxpayers would have us believe


21
 Corporation received only nominal consideration from Son in return for the grant of the option.  The stated consideration of ten dollars was never paid.  Taxpayers nevertheless compare this option to the Pope & Carter option, arguing that a major portion of the consideration paid by Pope & Carter was its efforts in obtaining favorable zoning.  According to taxpayers, Son's efforts in developing the properties likewise constituted fair consideration for Son's option.  This comparison of the two options ignores one essential fact: Pope & Carter was obligated to expend reasonable efforts while Son's option did not obligate him to do anything.  Even conceding that Son's activities contributed significantly to the appreciation of the Piedmont-Old Ivy properties, these efforts were not based on a legal obligation of Son to Corporation.  Corporation could not have voided the option had Son not contributed to the zoning effort.  The option explicitly provided that Son could assign his rights, and it cannot seriously be contended that an assignee could have been required to undertake rezoning efforts when the option nowhere required such efforts.  Furthermore, it is just as likely that Son's efforts were motivated by his personal interest in the properties as by an obligation to Corporation.  For the remainder of this discussion, we proceed on the basis that only nominal consideration was paid by Son.  Thus, to the extent the option rights acquired by Son had value, that value is equivalent to the benefit conferred on Son by the grant of the option


22
 According to the district court's findings, the fair market value of the Piedmont property was approximately $175,000 when Son's option was granted in 1966.  The $88,000 exercise price for purchasing a one-half interest was thus a reasonable valuation of the underlying property at that time.  Similarly, modification of the option to include the Old Ivy property in 1967 reflected the value of that property at the time of the modification.  The exercise price was increased by $12,000 or approximately one-half the purchase price of the Old Ivy property.  Thus if the grant of Son's option is considered as a single event, taxpayers are correct that the exercise price reflected the fair market value of the underlying property at the time of grant
The analysis, however, is complicated by the fact that the 1967 modifications of Son's option to include the Old Ivy property also extended the exercise date of the original option.  In fact, were it not for the 1967 extension, the 1966 option would have expired before it was exercised.  Even if taxpayers' reading of Palmer is correct, Son received valuable rights if the 1967 transaction is treated as the grant of a new option, which was ultimately exercised by Son.
The district court found that the acquisition of the Old Ivy property rendered the Piedmont property eligible for rezoning for the first time and substantially increased the value of the Piedmont property.  Record support for this finding includes the fact that only 13 days subsequent to the grant of Son's 1967 option extension, Pope & Carter expended valuable consideration for an option with an exercise price of $500,000.  If the 1967 extension constituted a new option, its exercise price of $100,000 was clearly less than the fair market value of a one-half interest in the property.  For present purposes, however, we shall ignore this complication and treat the exercise price as representing a reasonable valuation of the underlying property at the time of grant.  In this regard, we shall use the term "at the time of the grant" without distinguishing between the 1966 option and the 1967 amendment.


23
 The government argues that it is unrealistic to believe that the option was of no economic value to Son.  Any determination of whether the grant of an option to purchase property constitutes a distribution of valuable rights must consider not only the "spread" between the exercise price of the option and the fair market value of the underlying property, but also the length of time during which the rights can be exercised and the potential for appreciation during that period.  The government maintains that where, as here, the option remained open for a period of over two years, during which time favorable zoning action substantially increasing the value of the underlying property was a significant possibility, the option must have been valuable to Son


24
 Even under the pre-1954 version of the revenue laws, the Supreme Court had explicitly recognized that an option could constitute "property" in other contexts and might have value as such.  Helvering v. San Joaquin Fruit & Investment Co., 297 U.S. 496, 56 S.Ct. 569, 570, 80 L.Ed. 824 (1936).  However, the broad section 317(a) definition of property for purposes of section 301 was not contained in the Revenue Act of 1928, under which the Palmer Case was decided


25
 In Commissioner v. Gordon, 391 U.S. 83, 88 S.Ct. 1517, 20 L.Ed.2d 448 (1968) the Supreme Court had occasion to examine the applicability of Palmer under the 1954 Code.  The question before the Court in Gordon was whether a corporate distribution of rights to purchase stock of another corporation constituted a dividend.  The Court held that the distribution of valuable rights resulted in a dividend.  But because the value of the shares exceeded the exercise price when the rights were distributed, the court did not consider whether the distribution of valuable rights results in a dividend when the exercise price equals the reasonable value of the shares on the date that the rights are distributed.  88 S.Ct. at 1521 and n. 4.  The Court also declined to decide whether the dividend occurs at the time of grant or at the time of exercise.  See 88 S.Ct. at 1521


26
 Palmer itself may be such a case.  Indeed, the Palmer decision could be explained on the basis that where the option period was limited to a few days and no appreciation in the underlying property during the option period was contemplated, virtually the entire value of the option was reflected in the spread between the exercise price of the option and the market value of the underlying property


27
 One empirical study of regularly quoted stock options is discussed by D. Bret Carlson in his article Taxation of "Taxable" Stock Rights: The Strange Persistence of Palmer v. Commissioner, 23 Tax.L.Rev. 129, 143 n. 48.  According to Carlson, the study reveals that extended options to purchase stock at the market value of the shares when the rights are issued are, in fact, of great value.  The "study demonstrates that when the exercise price is at parity with the current value of the stock, and the option has at least two years to run, the value of the option is equal to about 41 per cent of the exercise price."  The study also indicated that "as the option period decreases below two years, the value of the option declines at a steady rate 1/24 for each month less than two years."


28
 In constructive dividend cases involving expenditures which confer a benefit on a shareholder, this court has held that the determination of a constructive dividend Vel non turns on whether the payments are "primarily for shareholder benefit" or "primarily for corporate benefit."  Loftin and Woodard Inc., supra, at 1215; Sammons v. Commissioner, 472 F.2d 449 (5th Cir. 1972).  These cases have generally involved corporate payments, ostensibly for corporate purposes, which improve the value of a shareholder's property, See Loftin and Woodard, Inc., supra; Crosby v. United States, supra; or a transfer of funds between related corporations, See Sammons v. Commissioner, 472 F.2d 449 (5th Cir.), Cert. denied, 402 U.S. 945, 91 S.Ct. 1621, 29 L.Ed.2d 113 (1971).  See also Hardin v. United States, supra (no business purpose for corporate payments to widow of controlling shareholder's brother, a former employee, even though taxpayer alleged that corporation had a duty to widow because of her husband's past services on behalf of the corporation)
In Green v. United States, supra, a case involving a sale of property to a shareholder at less than fair market value, we held that the sale would constitute a constructive dividend if the taxpayer in his personal capacity exercised "substantial influence" over the corporate decision to sell the property at a bargain price.  460 F.2d at 420-21.  This standard has the same purpose as the "primary benefit" test; in both instances the issue is whether the distribution was made for a corporate, rather than a shareholder, purpose.


29
 Under the clear error standard, we must decide "whether the district court's findings of fact are without substantial evidentiary support or are premised on that court's misapprehension of the effect of the evidence before us."  Loftin and Woodard, Inc., supra, at 1215


30
 In Gordon a corporation distributed to its shareholders valuable rights to purchase stock in a related corporation.  The options were issued on September 29, 1961 and were exercised by taxpayers on October 5 and October 11.  Apparently none of the litigants contended that the value of the underlying shares had changed during the twelve days between the grant and exercise of the rights, and the Court therefore chose to value the option at the time of exercise at the fair market value stipulated by the parties.  88 S.Ct. at 1520-21, 1525


31
 Our ultimate holding, based on the assumption that the dividend occurred when the option was granted to Son, is that the value of Son's option was unascertainable when granted and that under the open transaction doctrine, its valuation is deferred until the option is exercised.  The amount of the dividend is thus calculated as the fair market value of the option at the time of exercise.  (Were consideration paid for the option, this amount would be subtracted to determine the value of the dividend.)  If, instead, we assume that the dividend occurred at the time of exercise, the amount of the dividend would again be the value of the option at the time of exercise.  The only other theoretical possibility would be to value the option at the time of exercise with reference to its value on the date it was granted.  See footnote 35 Infra.  Application of this rule to the case at bar, however, would not change the result.  Since the value of the option at the time of grant was unascertainable, its value would still have to be determined as of the time it was exercised


32
 The government perhaps concedes too much in agreeing with taxpayer that the dividend occurs at the time of grant.  Suppose, for example, the value of an option is ascertainable at the time of grant, but the Commissioner does not discover the existence of the option until it has been exercised, perhaps years later.  In some cases the government may be precluded from reopening the prior tax year.  Indeed, one of taxpayers' arguments here is that the 1966 and 1967 tax years are not in issue and thus no tax on the constructive dividend can be collected.  Had we held that the value of the option at the time of grant was in fact ascertainable, taxpayers' argument might have foreclosed taxation on the constructive dividend.  This problem is discussed further in footnote 35 Infra


33
 The court reasoned that the option had no ascertainable market value at the time of grant
first because of the ad hoc nature of such a real estate option; second, the indeterminate length of time it is to be in effect; and third and perhaps most importantly because of questionable value to, and enforceability in the hands of, any third party of such an option for which no consideration was given and which represented an intra-family transaction.  The Pope & Carter option, an arms-length transaction, does not furnish evidence of such free marketability.


34
 The valuation problem may not be the only reason for deferral of taxation in the employee stock option area.  Deferral is based in part upon a presumption that unless an option can be freely disposed of by an employee at the time it is granted and has a value the employee can realize, the employer must have intended to compensate the employee not by the value of the option at the time of grant but by the amount the employee will be able to realize when and if the value of the underlying property appreciates to a value in excess of the exercise price, perhaps due in part to the employee's own efforts.  See Commissioner v. LoBue, 351 U.S. 243, 76 S.Ct. 800, 100 L.Ed. 1142 (1956); Commissioner v. Smith, 324 U.S. 177, 65 S.Ct. 591, 89 L.Ed. 830 (1945)


35
 We are aware that this application of the open transaction doctrine will lead to harsh results in some cases.  We have assumed that the constructive dividend occurs when the option is granted.  If this assumption is correct, delaying the recognition and valuation of the dividend until the option is exercised will always result in a higher valuation of the option where the optionee exercises the option after the option property has appreciated.  For example, in the case at bar, it would not be surprising if the district court on remand concluded that the value of Son's option when exercised was approximately one-half of $500,000 minus $100,000 or about $150,000.  Yet assuming that the $500,000 exercise price in the Pope & Carter option represented the anticipated value of the property if the rezoning efforts succeeded, the value of the option before December, 1968 must have been less than $150,000 because it was uncertain whether the rezoning application would be approved.  Consequently, if these assumptions are valid, application of the open transaction doctrine in this case operates not only to delay recognition of the constructive dividend taxable to Father, but also to increase the amount of that dividend.  It is correct that even if the dividend had been valued and the resulting tax paid at the time the option was granted,  the increase in value of the option resulting from the subsequent increase in value of the underlying property would have been reflected in Son's tax liability when the property was sold to Pope & Carter.  Nonetheless, valuing the option at the time it is exercised transfers the tax liability on this amount from Son to Father
This seemingly harsh result can in large part be attributed to taxpayers' own failure to introduce evidence on the value of the option at the time of grant.  If the value of property received cannot be ascertained with reasonable accuracy, recognition must be delayed until that value can be ascertained.  Burnet v. Logan, supra.  In carrying out their responsibilities in the tax area, judges just attempt to apply the governing principles chosen by Congress in the Internal Revenue Code rather than devise ad hoc rules based on the individual judge's sense of equity and fairness.  Application of ad hoc rules often will lead to ad hominem results.
One further difficulty with our application of the open transaction doctrine is that courts may be reluctant to conclude that the value of the property at issue was ascertainable at the time of receipt when the relevant tax year is no longer open.  See footnote 32 Supra.  For example, in Estate of Stahl v. Commissioner, 442 F.2d 324 (7th Cir. 1971), the court affirmed a district court's application of the open transaction doctrine to the amounts received on the sale of patents.  In rejecting taxpayers' argument that taxation could only be imposed in the year of sale, the court remarked that the statute of limitations had apparently run on the year of sale.  Cf. Estate of Meade v. Commissioner, supra, 489 F.2d at 163.  Likewise, in the instant case the tax years corresponding to the grant of the option are not in issue.  This often will create a dilemma for the district court: while the option should, in theory, be valued when received, a determination by the court that this value is ascertainable will mean that the taxpayer escapes taxation on the constructive dividend altogether.
We need not resolve this problem here.  We do suggest, however, that one possible approach for protecting the government's interest in taxing constructive dividends resulting from the grant of an option during a year for which the statute of limitations has run is to divorce recognition and valuation.  In other words, if the taxpayer elects to report the receipt of the option and to value it in year granted, any dividend should be taxed in that year if the value of the option is ascertainable.  Where the value is unascertainable, the dividend would not be recognized until the sale or exercise of the option.  If, as here, the taxpayer failed to report and value the option at the time it is granted, the dividend would be recognized only upon the sale or exercise of the option.  The amount of the dividend, however, would still be the value of the option when granted if that value were ascertainable.  This approach would allow taxpayers to value the option at the time it is granted and would protect the government when the existence of the option is not discovered until later tax years.  We decline to pass on whether Congress intended such a scheme in section 301, however, because the result in this case does not depend on whether the dividend should be taxed when the option is granted or when it is exercised.


