                       T.C. Memo. 1995-452


                     UNITED STATES TAX COURT




SPYGLASS PARTNERS, RICHARD E. SHEA, TAX MATTERS PARTNER, ET AL.,1
Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 22789-93, 22790-93,    Filed September 25, 1995.
                 22791-93.



     J. Gordon Hansen, John B. Wilson, and Scott R. Carpenter,

for petitioners.

     Richard W. Kennedy, for respondent.




     1
      These related partnership cases have been consolidated
herewith for purposes of trial, briefing, and opinion: Pebble
Beach Partners, John J. Gleason, Tax Matters Partner, docket No.
22790-93; and Cypress Point Partners, John J. Gleason, Tax
Matters Partner, docket No. 22791-93.
                                 - 2 -


             MEMORANDUM FINDINGS OF FACT AND OPINION

     GERBER, Judge:     Respondent issued a notice of final

partnership administrative adjustments to each of the three

partnerships involved in these consolidated cases, determining

adjustments for the 1984 and 1985 taxable years.    After

concessions by the parties, the sole issue for consideration is

whether any of the partnerships purchased condominiums in

December 1983 for purposes of determining whether deductions may

be taken, under section 483,2 for unstated interest.3

                           FINDINGS OF FACT4

     David G. Derrick (Derrick), along with 11 other persons,

orally agreed, during December of 1983, to form three Utah

general partnerships:    Spyglass Partners, Pebble Beach Partners,

and Cypress Point Partners.    The principal place of business of

each partnership at all relevant times was in Utah.     Written or

formal partnership agreements were not drawn or executed until



     2
      Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the years in issue. Rule
references are to this Court's Rules of Practice and Procedure.
     3
      The parties have agreed that the resolution of the factual
issue concerning when the purchase of the condominiums occurred,
which will be determinative of whether sec. 483 applies, will
also be determinative of some of the "settled" issues.
     4
      The parties' stipulation of facts and exhibits are
incorporated by this reference. Respondent agreed that the
condominium purchases were actually consummated and were not sham
transactions. Respondent did not agree, however, that the
condominiums were purchased prior to July 1984.
                                - 3 -


June 1984.   Derrick was the managing general partner of each

partnership.    The primary business purpose of each partnership

was to acquire and hold for rental and resale, existing

condominium units located in property developments near the Park

City, Utah, ski resort area.

     During December 1983, Derrick made a $10,000 capital

contribution and a $220,000 loan to each of the three

partnerships.    At the end of December 1983, Derrick, on behalf of

each partnership, drafted and executed informal purchase

agreements (December agreements) to acquire condominium units.

Each partnership was to purchase 7 condominium units in 1

development and 16 condominium units in another, for a total of

69 units.    The December agreements required a $10,000 downpayment

per condominium unit ($690,000 total), with the balances to be

paid in two installments:    One on July 2, 1984, and another on

either December 27 or 30, 2013.    The aggregate installment

obligations of the partnerships are as follows:

               16 Condominium Units       7 Condominium Units
Partnership July 2, 1984 Dec. 27, 2013 July 2, 1984 Dec. 30, 2013

Pebble Beach $3,699,539     $11,602,773    $1,570,808   $4,362,378
Cypress Point 3,763,989      11,796,111     1,505,538    4,189,221
Spyglass      3,688,132      11,568,533     1,582,378    4,393,074

As an example, a single condominium unit had a $658,655 selling

price, a $154,284 first installment due July 2, 1984, and a

$494,371 second installment due December 27, 2013.

     The December agreements, in addition to setting forth the

payment terms, required the sellers to place in escrow the deeds
                                - 4 -


that were to be recorded at the time the July 2, 1984,

installment was paid.   The sellers also agreed to subordinate the

December 2013 installment payments to any permanent financing

obtained by the partnerships.   The December agreements also

recited that "All of the burdens and benefits of ownership of the

subject property are transferred from * * * [seller] to * * *

[the purchasing partnership]" and "This document, may at the

mutual consent of * * * [the parties], be superseded by a more

formal contract of sale, as long as said contract does not change

the terms and conditions outlined herein."

     On or about December 30, 1983, the partnerships and

condominium sellers executed 69 separate informal memoranda of

condominium purchase agreements (December memoranda).    The

memoranda referenced the December agreements and had descriptions

of the specific condominium units under contract attached to

them.   They also required the parties to cooperate in recording

any documents necessary to evidence any termination of the

December agreements.    The December memoranda were recorded with

the local county's recorder's office.

     The seller of 3 groups of 16 condominium units (or a total

of 48 units) had entered into purchase agreements during November

1983, after the builder's initial default on its construction

mortgage with Western Savings and Loan Co. (Western Savings).

The seller of 3 groups of 7 condominium units (or a total of 21

units) purchased the units from the builder during the last few
                               - 5 -


days of 1983, at a time when the loans due Western Savings were

in default.

     Prior to January 1, 1984, Derrick paid the escrow agent,

Western States Title Co., $690,000.    The $690,000 was the sum of

Derrick's $10,000 capital contribution, and $220,000 loan, to

each of the three partnerships ($30,000 plus $660,000).    In early

1984, Derrick notified the condominium management company of the

partnerships' ownership.   During January 1984, the partnerships

caused an insurance agency to inspect the condominiums in

connection with the purchase of liability and casualty insurance.

An insurance binder was executed on January 17, 1984.    From the

time of the December 1983 agreements, Derrick was generally

responsible for overseeing the management companies, which

collected rents, advertised for rentals, paid expenses, and

handled the day-to-day condominium operations.   Derrick also was

involved in the repair and maintenance of some of the

condominiums, including water leaks.

     By letters dated February 15, 1984, Western Savings

acknowledged the partnerships' inquiry about financing 48-unit

and 21-unit groups of condominiums with loans, in the aggregate,

of up to $10,700,000 and $3,939,000, respectively.   Western

Savings had been the lender to prior condominium owners.    During

April 1984, the partnerships opened bank accounts, yet the

accounts had limited activity during April and May 1984.    The

activity did involve the receipt of rental income from
                                - 6 -


condominiums and the return of that income in accordance with a

request from Western Savings' legal counsel.    On approximately

June 15, 1984, Derrick and other individuals formed SK Management

Co. (SK) to manage the condominiums, and, by letter dated June

15, 1984, the prior management company acknowledged receipt of

the letter and agreed that SK would take over the condominium

management.   The partnerships also engaged an accountant to

review the records of the former management company, and, in

September 1984, the accountant provided some financial data

regarding the period of operations from December 27, 1983,

through May 31, 1984.

     During May and June 1984, the partnerships and sellers

entered into separate identical, formal agreements or contracts

(May agreements) for the sale of each condominium.    These

superseding agreements did not change the basic obligations of

the December agreement. The May agreements merely provided

additional detail with which to carry out the intent of the

December agreements.    The May agreements, although executed in

May or June 1984, were dated as of the December 1983 date which

corresponded to the December agreements. The May agreements

provided for the same July 2, 1984, settlement date, and, in

accordance with the December agreements, recited that the

partnerships were entitled to possession of the condominiums, as

well as all of the benefits and burdens of ownership.
                               - 7 -


     The following documents were attached to the May agreements:

(1) A recourse promissory note for the July 2, 1984, installment;

(2) a recourse promissory note for the December 2013 installment;

(3) a $50,000 judgment note for each condominium providing for

enforcement by the sellers if the partnerships defaulted on

payment of the July 2, 1984, installment; (4) a deed of trust

encumbering each condominium as security for payment of the two

installment notes; (5) a special warranty deed for each

condominium; and (6) a quitclaim deed for each condominium.

Western States Title Co. was to hold and record the deeds and

close the escrow upon payment of the July 2, 1984, installment.

     In the event of a presettlement default by the partnerships,

the agreement provided each seller with two remedies.   First, the

seller would be relieved from all obligations in law and equity,

including conveying title, and the buyer would become a tenant at

will.   In addition, the quitclaim deeds executed by the buyer

would be recorded by the escrow agent, and payments made by the

buyer would be retained by the seller as liquidated damages along

with the judgment note.   Second, the seller could declare the

installment notes due, tender title to the buyer, and foreclose

under the laws of the State of Utah.   In the event of the

seller's presettlement default, the buyer's sole remedy was to

terminate and rescind the agreement; and the seller was to return

all sums paid by the buyer to date along with 6-percent interest,

at which time the escrow agent would record the buyer's quitclaim
                               - 8 -


deeds, and the seller and buyer would have no further obligations

to each other.

     On or about June 5, 1984, all partners, other than Derrick,

contributed funds to the partnerships as initial capital

contributions.   At about the same time (early June 1984), the

partners executed written, formal partnership agreements, which

stated that they were "effective as of December 15, 1983."

Subsequently in June 1984, each partnership admitted additional

partners by means of capital contributions and execution of the

latest written agreements.   In 1984, the partnerships elected an

interim closing of their books on the basis that the condominium

sales occurred in December 1983, in order to allocate profit and

loss between the original and new partners.

     Each partnership timely paid the July 2, 1984, installment

to the seller, and the escrow agent recorded documents in

accordance with the written agreements.   The source of the July

2, 1984, installment payments, for each partnership, was

approximately $1 million from capital contributions and

approximately $4,200,000 attributable to nonrecourse loans from

Western Savings.   The loans were amortized on a 30-year schedule

subject to an 8-year call, and included shared appreciation

provisions for the lender.   Legal title to the condominiums did

not pass to the partnerships until on or after July 2, 1984.

     During November 1984, Derrick represented the partnerships

before the condominium owners association, and financial
                               - 9 -


statements for January 1 through September 30, 1984, were

reviewed.   The financial statements reflected that the

partnerships were being allocated income and expenses from the

subject condominiums beginning on January 1, 1984.

     The partnerships' 1984 Federal income tax returns reported

interest deductions under section 483.    The parties agree that,

if petitioners are successful, the method used by the

partnerships to report the interest deductions was correct.   If,

however, respondent is successful, the method for reporting the

partnerships' interest deductions should have been in accordance

with section 1.446-2, Proposed Income Tax Regs., 51 Fed. Reg.

12031 (Apr. 8, 1986).

     Midway through 1985, the partnerships defaulted on the debt

obligations to Western Savings.   During September 1985 the

partnerships voluntarily transferred the condominium units to a

third party, subject to the installment obligation due Western

Savings in 2013.   The note underlying that installment was to be

subordinated to any promissory note or lien securing the loan

taken out to pay the first installment.   The partnerships' 1985

Federal tax returns reflected losses from the disposition of the

condominiums.

     The fair market value of each condominium, as of December

1983, was equal to the downpayment plus the present value of the

purchase price installments (determined pursuant to section

1.483-1(g)(1), Income Tax Regs.).
                               - 10 -


                               OPINION

     The parties agree about the substance and requirements of

section 483.   Their sole disagreement is whether the first

installments (the July 2, 1984, installments) were due more than

6 months after the date of sale pursuant to a contract containing

unstated interest and requiring payments more than 1 year after

the sale.   In essence, the question is whether, in each instance,

a sale occurred during December 1983.    If the sales occurred in

December 1983, petitioners will be successful; if the sales

occurred later (less than 6 months before the first installment),

respondent prevails, and petitioners are not entitled to deduct

interest under section 483.5

     In Williams v. Commissioner, T.C. Memo. 1992-269, affd.



     5
      For the period under consideration, sec. 483(a) treated as
interest an amount determined by means of a statutory formula and
applied to the principal payments on a pro rata basis. See sec.
1.483-1(a)(1), Income Tax Regs. Amounts so allocated (as imputed
interest) were deductible by a cash basis taxpayer in the year in
which payment was made. If the taxpayer was on the accrual
method of accounting for tax purposes, then the deduction was to
be claimed in the year in which the payment became due. Sec.
1.483-2(a)(1)(ii), Income Tax Regs. Interest imputed under sec.
483 was treated as interest "for all purposes of the Code." Sec.
1.483-2(a)(1)(i), Income Tax Regs. Sec. 483, with certain
exceptions set forth in sec. 483(d), applies

     to any payment on account of the sale or exchange of
     property which constitutes part or all of the sales
     price and which is due more than 6 months after the
     date of such sale or exchange under a contract * * *
     under which some or all of the payments are due more
     than 1 year after the date of such sale or exchange
     * * * [Sec. 483(c).]
                             - 11 -


1 F.3d 502 (7th Cir. 1993), and Lang v. Commissioner, T.C. Memo.

1993-474, this Court analyzed similar condominium transactions

and found that section 483 did not apply because the time between

the sale date and the first installment was less than 6 months.

Under the facts in those cases it was found that the initial

agreement, although entered into more than 6 months before the

first installment, constituted an option and not a sale.

     In Benedict v. United States, 881 F. Supp. 1532 (D. Utah

1995), the U.S. District Court for the District of Utah also

analyzed a similar condominium transaction and found that section

483 did apply because the time between the sale and first

installment was more than 6 months.   In that case, the court

found that the buyer acquired an equitable interest, and that the

benefits and burdens of ownership passed to the buyer upon

execution of the initial informal agreement.    Factual differences

exist between prior Tax Court cases and the Benedict case.

Moreover, the consolidated cases now before this Court have

significant factual differences from all of the above-cited

cases.

     In their consideration of when the sale occurred, the courts

characterized their task as a factual one.6    In reaching their

ultimate factual findings, the courts were guided by Utah law.


     6
      The U.S. Court of Appeals for the Seventh Circuit expressed
the view that the case presented a mixed question of fact and
law, but there was no disagreement about the standard being
followed. Williams v. Commissioner, 1 F.3d 502, 505 (7th Cir.
1993), affg. T.C. Memo. 1992-269.
                              - 12 -


The prior court opinions, although helpful to our analysis, do

not control the outcome of the factual questions presented in the

cases under consideration.

     Respondent contends that petitioners' cases are no different

from those already decided by this Court and, in one instance,

approved by a Court of Appeals.   Petitioners contend that these

cases are factually distinguishable from Williams v.

Commissioner, supra, and Lang v. Commissioner, supra, and

petitioners assert that the rationale of Benedict v. United

States, supra, should be followed.     Because we are faced with a

factual question, we first look to the record in these cases.

Thereafter, we can compare the facts herein to those of the other

cases.

      Petitioners bear the burden of showing that they were

entitled to the deductions in question.    Rule 142(a); New

Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934).     To be

successful, petitioners must show that a sale was completed

during December 1983.   In a Federal tax proceeding, the question

of when a sale is completed is to be resolved by the facts and

circumstances in each case, and no one factor is controlling.

Baird v. Commissioner, 68 T.C. 115, 124 (1977); Clodfelter v.

Commissioner, 426 F.2d 1391 (9th Cir. 1970), affg. 48 T.C. 694

(1967).   Concerning real property, a sale generally is completed

at the earlier of the transfer of legal title or the practical

assumption of the benefits and burdens of ownership.     Baird v.
                                - 13 -


Commissioner, supra at 124; Dettmers v. Commissioner, 430 F.2d

1019 (6th Cir. 1970), affg. Estate of Johnston v. Commissioner,

51 T.C. 290 (1968).    Our factual inquiry must focus on the shift

of the benefits and burdens of ownership.       Baird v. Commissioner,

supra at 124; Merrill v. Commissioner; 40 T.C. 66 (1963), affd.

per curiam 336 F.2d 771 (9th Cir. 1964).      In a Federal tax

controversy, State law controls the determination of the

taxpayer's interest in the property, and the tax consequences are

then determined under Federal law.       United States v. National

Bank of Commerce, 472 U.S. 713, 722 (1985) (and cases cited and

quoted therein).

     Unquestionably, petitioners did not acquire legal title

until July 2, 1984.    Accordingly, we must consider whether the

partnerships acquired equitable interests (i.e., the benefits and

burdens of ownership) prior to 1984.      Our decisions in Williams

and Lang, and the District Court's decision in Benedict, used the

factors outlined in Grodt & McKay Realty, Inc. v. Commissioner,

77 T.C. 1221, 1237-1238 (1981) (where it was decided whether a

sale of cattle had occurred).    We use the same factors here.

     Legal Title.     As in prior cases, legal title did not pass

until the closing or settlement, which was the date of the first

installment.   As noted in other opinions, the lack of legal title

is not fatal to the completion of a sale of real property.       For

example, in Baird v. Commissioner, supra at 126, it was held that
                               - 14 -


the taxpayer became the equitable owner of realty under Utah

State law, although legal title had not passed.

     Intent of the Parties to the Transaction.7   First, we find

it significant that petitioners and respondent agreed that the

condominium transactions under consideration are not shams.    The

authenticity of the documents used by the parties is not

questioned.    Respondent does not question that the parties

intended that ownership of the condominiums was to pass.

Respondent, however, argues that the 1983 agreements did not rise

to the level of committing the parties to buy or sell the

condominiums.    Respondent contends that, in substance, the

December 1983 agreements were nothing more than options to

purchase condominiums.    Accordingly, respondent's approach is one

of substance over form with respect to the December 1983

documents.    Respondent acknowledges factual differences between

Williams and these cases, yet contends that the net result should

be the same.

     Although the informal documents reflect the intention of the

parties to form partnerships and to transfer ownership of the

condominiums to the partnerships, respondent argues that there is

a lack of monetary commitment sufficient to support the form of

the December agreements.    Respondent notes that, initially, all

capital contributions were attributable to Derrick.    In the same


     7
      Under Utah case law, when interpreting a contract, the
parties' intentions are generally controlling. See, e.g.,
Winegar v. Froerer Corp., 813 P.2d 104, 108 (Utah 1991).
                               - 15 -


vein, respondent notes that the amount of capital and loans

contributed by Derrick to each partnership ($10,000 and

$220,000), although placed in escrow, was de minimis when

compared to the purchase price set forth in the agreements.        In

other words, respondent contends that both the partnerships and

sales agreements were underfunded.

     This lack of funding leads to respondent's additional

contention that the partnerships and sales agreements were

without substance until later documents were drafted and executed

and the first installment payments were made.    Respondent accepts

that the informal agreements express the parties' intent to agree

to buy and sell the condominiums.    However, respondent contends

that the sale did not take place in December of 1983.

     Finally, respondent suggests that certain language in the

December agreements indicates their conditional nature.      For

example, respondent refers to the following language:    "In the

event Seller or Buyer, as the case may be, elects to terminate

the Agreement in accordance with the terms thereof, Seller and

Buyer shall cooperate in executing and recording any and all

documents necessary to evidence the termination of the

Agreement".    We find that respondent's reliance upon this

language is misplaced.    The referenced language does not

establish that any party could unilaterally escape from its

obligations.
                              - 16 -


     We find that it was the parties' express intent to effect

the sale of the condominiums by means of the December agreements.

Albeit informal, those agreements were not conditional in their

terms or voidable at will.   The question remains, however,

whether the parties effected their intent so that the

partnerships could be considered equitable owners of the property

as of December 1983.

     Equity in the Condominiums.   Each partnership paid $10,000

down for each condominium, for a total of $230,000 for 23 units

per partnership.   This $230,000 was preliminary to first

installments totaling about $5,200,000 due just over 6 months

later and second installments of about $16 million due in 30

years.   As pointed out by respondent, there is great disparity

between the downpayment and the first and/or second installments.

A relatively small downpayment, however, does not require our

finding that the $10,000 was not a payment towards equity in the

designated condominiums.   The language of the December agreements

was specific as to the intention of the parties to effect the

sale and the transfer of the benefits and burdens of ownership.

Those agreements were without conditions.   The term "option" is

not used, and the parties were not provided a choice as to

whether they wished to buy or sell.    Respondent, however, argues

that the small amount designated as a downpayment, coupled with

the parties' ability to walk away from the transaction (including

the return of the $10,000 in case of default or termination)
                               - 17 -


renders the terms of the December agreements options rather than

sales contracts.

     Utah courts have held that "an option contract for real

property requires one offer and acceptance of the exclusive right

to purchase the property and another offer and acceptance for the

actual transfer of the property."    Property Assistance Corp. v.

Roberts, 768 P.2d 976, 978 (Utah Ct. App. 1989).    More

particularly, "Two elements exist in * * * [an option] contract:

(1) an offer to sell, which does not become a contract until

accepted; and (2) a contract to leave the offer open for a

specified time."   Id.   The December agreements were not, in form,

options.   A second contract, in addition to the December

agreements, was not necessary to effect the July 2, 1984,

closing.

     Respondent argues that the parties could walk away from the

transaction with little or no monetary loss.   In that regard, the

agreements, as revised by the May agreements, provided specific

remedies in the event of presettlement default.    If the

partnerships defaulted, the sellers had a choice of two remedies.

First, each seller would be relieved from all obligations in law

and equity to convey title to the buyer, and the buyer would

become a tenant at will.   All deeds executed by the buyer would

be recorded by the escrow agent, and the $10,000 payment made by

the buyer would be retained by the seller as liquidated damages

along with the $50,000 judgment note for each condominium unit.
                               - 18 -


Alternatively, the seller could declare the installment notes

due, tender title to the buyer, and foreclose under the laws of

the State of Utah.   If the seller defaulted, the buyer's sole

remedy was to terminate and rescind the agreement, whereupon the

seller was to return all sums paid to the buyer, along with 6-

percent interest.    Under those circumstances, the escrow agent

was required to record the quitclaim deed from the buyer to the

seller, leaving the buyer and seller with no further obligations

to each other.

     We are unable to find the substance of the agreements

between the parties here to be options solely because of the size

of the downpayment in relationship to the agreed-upon purchase

price.   The circumstances here are not equivalent to the parties'

having the option to walk away.    The buyers (partnerships) would

be subject to a penalty if the first installment was not made.

That is so because the seller had the choice of accepting

liquidated damages ($10,000 downpayment plus $50,000 per unit) or

declaring the installment notes due and then foreclosing.    In

that regard, the $60,000 damages approach 40 percent of the first

installment.   Although the damages represent a smaller percentage

of the second installment, that installment must be converted to

a present value.    Such conversion would cause the damages to be

relevant and proportionate to both installments.

     One can argue that the sellers were able to walk away from

the bargained-for price.    That argument, however, is wholly
                                - 19 -


dependent on whether the agreed-upon price was fair and amounted

to valuable consideration.    The facts reflect that the agreed-

upon price was not illusory.    Furthermore, the agreement did

result in the payment of the first installment and the passage of

legal title.   Therefore we conclude that the downpayments were

true equity in the condominiums.    Additionally, in order to find

that the December agreements were options under Utah law, we

would have to find that the May agreements were separate

contracts of sale.   The record does not support that finding, and

there is nothing conditional about the December agreements or the

parties' actions.

     Present Obligation.     We must consider whether the

partnerships were subject to enforceable obligations to purchase

real estate under Utah law.     United States v. National Bank of

Commerce, 472 U.S. 713 (1985); Major Realty Corp. v.

Commissioner, 749 F.2d 1483, 1486 (11th Cir. 1985), affg. in part

and revg. in part T.C. Memo. 1981-361.

     Petitioners contend that a Utah realty purchase agreement is

enforceable if it contains the essential terms of the parties'

understanding and meets the requirements of the statute of

frauds.    To meet the "essential terms" requirement, petitioners

list four specific requirements, to wit, "the agreement must

(1) designate the parties; (2) describe the property; (3) state

the purchase price; and (4) contain any additional essential

terms.    Reed v. Alvey, 610 P.2d 1374, 1378 (Utah 1980); Ferris v.
                               - 20 -


Jennings, 595 P.2d 857, 859 (Utah 1979)".    Finally, petitioners

point out that a property is sufficiently described if it cannot

be confused with other property.    In re Estate of Bonny, 600 P.2d

548, 549 (Utah 1979).

       Respondent, does not dispute petitioners' contention that,

in form, the agreements may be enforceable under State law.

However, respondent counters that, under Federal law, we must

look at all of the facts and circumstances to reach a conclusion

as to whether there was a sale.    Respondent contends that, if

enforceable, the December agreements did not constitute sales but

were instead mere options to purchase or sell the condominiums.

Respondent relies on the discussion in Williams v. Commissioner,

T.C. Memo. 1992-269, to support her contention that the December

agreements were merely options.

       In the Williams opinion, based on that record, it was found

that

       The meager penalty (restitution plus the payment of
       apparently below-market-rate interest) is inconsistent
       with any practical obligation on the part of the Seller
       and, in substance, supports the conclusion that the
       Seller had no more than an option to sell the
       Condominium, which it, of course, might decline to
       exercise. * * * [Fn. ref. omitted.]

That element, coupled with the fact that, in Williams, some of

the condominiums had not yet been completed, provided the

rationale for the conclusion that the contracts, although

expressed as a sale in form, were in substance options to sell.

The U.S. Court of Appeals for the Seventh Circuit, although
                                - 21 -


affirming our decision in Williams, pointed out that the seller

was committed because of the escrow of the deed and that the

option was in the buyer, rather than the seller.     Williams v.

Commissioner, 1 F.3d at 506-507.    One factor underlying the Court

of Appeals' reasoning was the fact that the condominium in

question was unfinished.    Ultimately, however, the court was

swayed by the fact that specific performance was waived and the

buyer would forfeit only $60,000 if the option was not exercised.

Id. at 507.   Once again, because of the relative size of the

amount forfeited to the amount that would have to be paid at

closing, the Court of Appeals characterized the transaction as

being a sale of a call for $60,000.      Id.

     The underlying question of whether the partnerships had any

enforceable obligations is one we must decide under Utah law.      We

find that the December agreements were enforceable obligations

with respect to the parties.    This, of course, is a major factor

to be considered in our ultimate analysis of whether, for Federal

tax purposes, there had been a sale during December 1983 within

the meaning of section 483.

     Right to Possession.     Concerning this aspect, the Williams

and Lang opinions focused on the fact that the condominiums were

unfinished.    The condominiums here were complete at the time of

the December agreements.    Furthermore, the condominium management

companies were notified in early 1984 of the partnerships'

ownership.    During January 1984, the partnerships caused an
                              - 22 -


insurance agency to inspect the condominiums in connection with

the purchase of liability and casualty insurance, and an

insurance binder was executed.   Finally, from the time of the

December 1983 agreements, Derrick was generally the overseer of

the management companies that collected rents, advertised for

rentals, paid expenses, and handled the day-to-day condominium

operations.   Possession of the condominiums by the partnerships

or buyers was possible, and it was exercised by and through a

general partner, Derrick.

     Payment of the Property Tax.    There was no reference to real

property tax in the December 1983 agreements.     In the May 1984

agreements (executed in May 1984, which related back to the

December 1983 agreements), the real property taxes were to be

prorated between the buyers and sellers as of the December 1983

execution date.   On this point, respondent argues that the May

1984 agreements may be the documents which created sufficient

enforceable obligations to constitute a sale, rather than an

option, for Federal tax purposes.8     Petitioners, however, counter

that the May 1984 documents were drafted solely to modify the

December 1983 agreements.   In that regard, petitioners contend

that the December 1983 agreements constituted a completed sale

and that the May 1984 documents simply added details to carrying


     8
      Respondent argued that the sale may have occurred either at
the time of executing the May 1984 agreements or at the time of
the subsequent closing or settlement date, but that in either
event petitioners would not have met the 6-month threshold of
sec. 483.
                                - 23 -


out the express intent of the earlier and more informal

documents.

     Initially, we do not consider the real estate tax proration

to be a significant aspect.    In the context of this case,

petitioners are attempting to show, by a preponderance of the

evidence, that the December agreements constituted a sale.    In

that context, adding the proration of real estate tax in a May

1984 addenda does not have much, if any, probative value in

meeting that burden.    Ultimately, however, the partnerships were

obligated to pay a pro rata share of the real estate tax for a

period beginning with the execution of the December 1983

agreements.

     Risk of Loss.     This aspect concerns the question of who

would bear any loss to the condominiums after the execution of

the December 1983 agreements.    This question was not addressed in

prior opinions because few, if any, improvements had been made in

Williams, Lang, or Benedict.     Here, however, the condominiums

were in existence prior to any agreements, and, if they were

damaged or dropped in value, someone would have to bear the loss.

     Petitioners argue that, under Utah's doctrine of equitable

conversion, the sales occurred in December 1983.    Under that

doctrine, at the time of the execution of a contract for the sale

of realty, the buyer acquires equitable ownership and the

seller's interest is reduced to "naked legal title".    This merely

serves as security for payment of the purchase price.    See Butler
                               - 24 -


v. Wilkinson, 740 P.2d 1244, 1254-1256 (Utah 1987); Lach v.

Deseret Bank, 746 P.2d 802 (Utah Ct. App. 1987).    In the instant

case, the deeds from the sellers to the buyers were held in

escrow and were to be recorded on July 2, 1984, after the payment

of the first installment.

     Respondent does not dispute petitioners' equitable

conversion position, yet, instead, continues to argue that the

December 1983 agreements were options and not sales, so that the

sellers would continue to bear the risk of loss.    The question of

risk of loss is, according to respondent, dependent upon the

ultimate question of whether, for purposes of petitioners'

Federal tax, the December 1983 agreements constitute sales or

options.    To some degree, respondent's position begs the

question.

     Petitioners' analysis of Utah law, on the question of

equitable conversion, reveals that, once a contract for sale of

realty becomes effective, the benefits and burdens of ownership

accrue to the buyer as a matter of law.    The form of the December

1983 agreements supports petitioners' equitable conversion

argument.    Moreover, as petitioners point out, the benefits and

burdens of ownership have been accepted as ownership for Federal

tax purposes.    See, e.g., Baird v. Commissioner 68 T.C. 115

(1977); Lach v. Deseret Bank, supra.    In addition, Utah courts

have applied the doctrine of equitable conversion for sales and

inheritance tax purposes.    See In re Estate of Willson, 499 P.2d
                              - 25 -


1298 (Utah 1972); Allred v. Allred, 393 P.2d 791 (Utah 1964).

Again, to reach an "option conclusion" here, we must accept

respondent's contention that the amounts the partnerships stood

to lose were de minimis in relation to the sale price.

Petitioners have made a strong case that equitable conversion

occurred at the time of the December 1983 agreements.

Accordingly the partnerships (buyers), based on the form of the

agreements, would bear any loss to the condominiums.

     Profits.   In the Williams opinion, the question of profits

from the condominiums was handled summarily because the

condominiums were unfinished and could not be rented.     Here, the

condominiums were finished and rented.     The December 1983

agreements, however, do not specify whether the seller or buyer

would be entitled to profits from the rental of the condominiums.

The December agreements did state that the buyers would receive

all the benefits and burdens of ownership.     Here, again, the

question turns on whether the sellers or buyers had those

benefits and burdens of ownership.     Accordingly, equitable

conversion at the time of signing the December 1983 agreements

would have a bearing on the issue.     In addition, general partner

Derrick advised the condominium management company, relatively

soon after the execution of the December 1983 agreements, that

the partnerships had become the owners of the realty.     After the

closing, accountings were made reflecting allocation of all
                               - 26 -


income and expenses (ostensibly profits) to the partnerships from

the time the December 1983 agreements were executed.

     Equitable Title.   Based on the record and the above

analysis, it is apparent, that in form, the partnerships had

acquired equitable interests in the condominiums, at the time of

the December agreements.9   In the Williams opinion, it was

acknowledged that the "buyers obtained at best some equitable,

not legal, interest in the property at the time the [initial]

purchase Agreement was executed".    Williams v. Commissioner, T.C.

Memo. 1992-269.   That opinion goes on to find that the substance

of the Williams transactions was an option, rather than a sale.

The Court of Appeals then reasoned that "There was no vesting of

'equitable title' in any sense, because the contract excluded a

suit for specific performance by the buyers."    Williams v.

Commissioner, 1 F.3d at 506.

     In the setting of these cases, the parties' December 1983

agreements must be considered as self-contained, permitting no

changes from the informally outlined terms and conditions.

However, the December 1983 agreements were susceptible of being

"superseded by a more formal contract of sale" by the "mutual

consent of * * * [the parties]".    The December 1983 date is the

crucial date upon which a sale (i.e., transfer of the benefits

and burdens) must have occurred to come within the section 483


     9
      The parties (and prior opinions) have made no distinction
between the concepts of equitable title and equitable interest.
For purposes of this opinion, we treat the terms as synonymous.
                               - 27 -


interest provisions.   The December agreements did not contain

default provisions.    The parties made the simple, but all-

encompassing statement:   "All of the burdens and benefits of

ownership of the subject property are transferred from * * *

[seller] to * * * [buyer] as of the date of this Agreement."

Further, the sellers placed in escrow all deeds relating to the

transfer of the property which were to be recorded by the escrow

agent on the designated closing date of July 2, 1984.

     Accordingly, at the time of the execution of the December

agreements, the buyers had not waived the specific performance

remedy.   That waiver occurred in connection with the superseding

May agreements in which a $50,000 liquidated damages note was

executed and exchanged.   The waiver of specific performance,

along with the liquidated damages provisions, did change the

partnerships' remedies.   At the time of the change, however, the

partnerships had exercised possession and control over the

condominiums.    Furthermore, financing had been arranged, and the

closing was imminent (about 1 month distant).   Under these

circumstances, respondent contends that the substance of the

transaction prior to the closing indicated an option.    However,

Utah law causes us to find that the transactions resulted in

equitable title or interests in the partnerships (buyers) as of

December 1983.

     Substance Over Form.    Having analyzed several factors, we

have concluded that, under Utah law, the December agreements
                                - 28 -


conferred the burdens and benefits of ownership on the

partnerships.    We now consider under Federal law whether, in

substance, a sale occurred in 1983 .     Even though the form of a

transaction may effect a particular result, a Federal court may

find that, in substance, the transaction was something other than

its form.   Gregory v. Helvering, 293 U.S. 465 (1935).

     The December agreements, although brief, are unambiguous

binding sales contracts under Utah law.     It is significant that

the basic operative sale components of the December 1983

agreements and memoranda were not changed in the May 1984

agreements.     The cost, method of payment, time of payment, and

other major operative terms and obligations remained the same.

In all agreements, the parties recited that the benefits and

burdens of ownership were in the partnerships or buyers as of

December 1983.     In addition, unlike prior cases, the condominium

units were completed and had been placed on the rental market

prior to the parties' agreements.     Rents were being collected,

condominium management was aware of the partnerships' ownership,

and allocations of income and expenses were made from the time of

the December agreements.

     The May 1984 agreements made additions to the December

agreements by including the $50,000 judgment notes, prorating

real estate taxes, requiring title insurance, and providing for

specific remedies in the case of default.     Accordingly, from the

time of the December 1983 agreements until execution of the May
                              - 29 -


1984 agreements, the parties' remedies could have included

seeking specific performance, damages, etc.   After execution of

the May 1984 agreements, the buyers could no longer bring suits

for specific performance against the sellers.   When the specific

performance remedy was waived10 and liquidated damages were

added, the partnerships had already exercised possession and

control over the condominiums, financing had been arranged, and

the closing was about 1 month away.    The deeds from the sellers

to the partnerships were placed in escrow so that payment of the

first installment would effectuate the recording of sellers'

deeds and the transfer of legal titles to the partnerships.     The

partnerships were committed to and ultimately did pay the

installments due on July 2, 1984.   When specific performance was

waived, matters had progressed to the point where the parties

were prepared and ready to exchange cash for legal title in the

amounts agreed upon in the December agreements.

     In addition, the partnerships stood to lose $60,000 per

condominium unit if the first installments were not made.     As

noted, the $60,000 represented about 40 percent of the first

installment.   Approaching the first installment (due in a little



     10
      Petitioners contend that specific performance by the buyer
would have been against the escrow agent who held the deeds.
Petitioners argue that limiting the remedy between the parties to
liquidated damages would not preclude the partnerships from
seeking specific performance from the escrow agent. We are not
persuaded by petitioners' argument; however, our analysis and the
resolution of the issues here make it unnecessary to further
pursue it.
                             - 30 -


over 1 month) the parties' understanding continued to be that the

buyers were possessors/owners.    Quitclaim deeds from the buyers

to the sellers were held in escrow in order to convey the

condominiums back to the sellers in case of the buyers' defaults.

The purpose of the quitclaim deed was to permit the seller to

regain unfettered title by eliminating the interest held by the

partnerships (i.e. equitable interests).    Accordingly, the buyers

(partnerships) had possession, profits, and an equitable interest

and had no need to seek specific performance.    Although the

sellers appear to have had the ability to escape if the market

value of the condominiums exceeded the contract price, that

aspect was of little import under the circumstances existing at

the time the May agreements were executed and until the July 2,

1984, closing, just over 1 month later.

     Prior opinions have reached the "option conclusion" mainly

because of the relevant amounts at risk or the lack of a

quantitatively relevant remedy.    The factual differences here

caused us to reach the ultimate finding that equitable title or

the benefits and burdens of ownership of the condominiums resided

in the partnerships as of December 1983 and were not divested by

the terms of the May agreements.    Under these circumstances, we

cannot conclude that the size of the downpayment or liquidated

damages should cause a finding that the December agreements were,

in effect, options and not contracts for sale.    Further, Utah law

does not support an "option finding" with respect to the December
                              - 31 -


agreements here.   After considering all of the factors here, we

find that the partnerships have shown that a sale occurred in

December 1983, both in form and in substance.   Accordingly,

petitioners have shown that they come within the section 483

requirements, and that they are entitled to the interest

deductions.

     To reflect the foregoing, and due to concessions of the

parties,

                                         Decisions will be entered

                                    under Rule 155.
