On September 18, 1998, the taxpayers both personally and on behalf of a land development corporation to be incorporated in the future (the "Company") agreed to submit on behalf of the Company an offer to purchase a property for development, and agreed (under rights referred to as the "Options") that upon their request, the Company would transfer to each of them certain lots included within the property at the same price that the Company paid to acquire those lots on December 22, 1998. The vendor of the property accepted an offer of the Company to purchase the property and on November 21, 1999 the Company sold to the two individual taxpayers two lots at a price that was substantially lower than what would have been their fair market value in the absence of the Options.
The fair market value of the lots when they were acquired by the taxpayers under the Options was equal to their relatively low cost to the Company given that the contractual obligation of the Company to sell the lots for this price was required to be taken into account in determining the lot's fair market value in light of the Beament case. Accordingly, no capital gain arose to the Company on disposing of the lots to the taxpayers.