SCOTUS Reports

Tag: Stock Options

  • MacDonald v. Commissioner, 23 T.C. 227 (1954): Bargain Stock Options as Taxable Compensation

    23 T.C. 227 (1954)

    A bargain stock option granted to an employee is considered compensation and is taxable as ordinary income if the option was intended to induce the employee to accept employment and as compensation for services to be rendered.

    Summary

    Harold E. MacDonald, a former vice president, accepted a similar position with Household Finance Corporation, forfeiting significant deferred compensation and accepting a lower base salary. As an inducement, Household granted MacDonald a stock option allowing him to purchase shares at a price below market value. The IRS determined the spread between the option price and the market value was taxable income. The Tax Court agreed, finding the option’s bargain nature was intended as compensation, not solely to grant a proprietary interest, despite the lack of a formal agreement preventing stock sales and Section 16(b) of the Securities Exchange Act. The court held that the option had an ascertainable market value, making the income taxable in the year of exercise.

    Facts

    Harold E. MacDonald was a vice president at Schenley Distillers Corporation. Household Finance Corporation approached him with an offer to become an executive. MacDonald was informed that Household executives typically acquired a proprietary interest in the company. MacDonald was unwilling to accept employment solely on the salary offered, as it would lead to a financial sacrifice. He wanted an additional inducement to make the change, including a bargain stock purchase. Household offered MacDonald a stock option to purchase up to 10,000 shares at a price between the market value and adjusted book value, with a loan to cover the purchase. MacDonald exercised the option in 1949, purchasing the stock well below market value. There was an oral understanding, but not a formal agreement, that MacDonald would not sell the stock while employed by Household. The IRS determined MacDonald realized ordinary income upon exercising the option.

    Procedural History

    The Commissioner of Internal Revenue determined a tax deficiency against Harold E. MacDonald for the 1949 tax year, arguing he realized income from the exercise of a stock option. The Tax Court considered the case. The court determined the option price was intended to be compensation for MacDonald’s services. A decision was entered under Rule 50.

    Issue(s)

    1. Whether the bargain stock option granted to MacDonald by Household was intended to be compensation for services rendered?

    2. Whether the value of the stock was ascertainable, given the oral understanding about selling the stock and Section 16(b) of the Securities Exchange Act of 1934?

    Holding

    1. Yes, because the court found the option’s bargain nature was intended to induce MacDonald to accept employment and serve as compensation.

    2. Yes, because neither the “oral understanding” nor Section 16(b) of the Securities and Exchange Act prevented MacDonald from selling his stock, and its market value at the date of acquisition was ascertainable.

    Court’s Reasoning

    The court framed the primary issue as one of fact: whether the stock option was intended to compensate MacDonald or provide him with a proprietary interest in the company. The court considered the negotiations, correspondence, and company statements related to the stock option and MacDonald’s employment. The court emphasized that the bargain nature of the option compensated for MacDonald’s financial sacrifice from leaving Schenley. The court found the option’s terms, particularly the below-market purchase price, were a key inducement for accepting the job. The court rejected MacDonald’s argument that the value was not ascertainable due to an oral agreement against selling the stock. The court noted this “vague agreement could not effectively bind petitioner” and that others subject to the understanding had sold shares. The court found that Section 16(b) of the Securities Exchange Act did not restrict MacDonald’s ability to sell the stock at its market value, as he could have sold the stock without violating the rule.

    Practical Implications

    This case is important for analyzing the tax implications of bargain stock options. It demonstrates that the court will examine the facts to determine the intent behind the option. The critical inquiry is whether the option was intended to compensate the employee for services. If so, any spread between the option price and the market value on the exercise date is taxable as ordinary income. The case highlights the importance of documenting the purpose of stock options. This case also clarifies that even if the option price is equivalent to the book value of the stock, the spread between the option price and the market value can be considered compensation. Lawyers and accountants should advise clients to obtain valuations when exercising options. The case demonstrates the significance of a clear and thorough analysis of all the surrounding facts and circumstances when determining the tax consequences of stock options, a key lesson for practitioners.

  • Lo Bue v. Commissioner, 22 T.C. 440 (1954): Stock Options as Compensation vs. Proprietary Interest

    Lo Bue v. Commissioner, 22 T.C. 440 (1954)

    Whether the grant of a stock option to an employee results in taxable compensation depends on whether the option was intended as compensation or to give the employee a proprietary interest in the business.

    Summary

    The U.S. Tax Court addressed whether the exercise of stock options by an employee resulted in taxable compensation. The Commissioner argued that Treasury regulations automatically treated the difference between the option price and fair market value as compensation. The court disagreed, holding that the determination of whether the options were compensation or a means to give the employee a proprietary interest was a question of fact. After reviewing the facts and the company’s intentions, the court determined that the options were granted to give the employee a proprietary interest, thus not triggering taxable compensation upon their exercise.

    Facts

    Philip J. Lo Bue was employed by Michigan Chemical Corporation. From 1945 to 1947, he was granted options to purchase the company’s stock at a set price. The options were granted to key employees, including Lo Bue, as part of a plan to give them a proprietary interest in the corporation. The company’s communications to Lo Bue emphasized the goal of employee ownership and participation in the company’s success. The options were offered at a price equal to or slightly below the market value of the stock at the time of the grant. In 1946 and 1947, Lo Bue exercised his options, and the fair market value of the stock exceeded the option price. The corporation deducted, on its tax returns for 1946 and 1947, the difference between the market value and option price of the shares sold to employees. The IRS determined that Lo Bue received unreported compensation in these years because of his exercise of the options.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in Lo Bue’s income tax for 1946 and 1947, arguing that the exercise of stock options resulted in taxable compensation. Lo Bue challenged this determination in the U.S. Tax Court. The Tax Court considered the case and issued its opinion, deciding in favor of Lo Bue and against the Commissioner.

    Issue(s)

    1. Whether the exercise of stock options by Lo Bue resulted in taxable compensation in 1946 and 1947.

    2. If so, in what amounts?

    Holding

    1. No, because the court found that the options were granted to give Lo Bue a proprietary interest in the corporation, not as compensation for his services.

    2. Not applicable, because the court ruled that there was no taxable compensation.

    Court’s Reasoning

    The court began by noting that the central issue was a question of fact: whether the stock options were intended as additional compensation or to give Lo Bue a proprietary interest in the company. The Commissioner argued that Treasury regulations, based on the Supreme Court’s decision in Commissioner v. Smith, mandated that the difference between the option price and market value was taxable compensation. The court disagreed, stating that the Supreme Court in Smith did not hold that every economic benefit conferred on an employee constitutes compensation. The court emphasized that the language in Smith stated, “Section 22 (a) of the Revenue Act is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected…”

    The court examined the corporation’s intent in granting the options. Based on the evidence, including letters sent to Lo Bue, the court determined that the options were primarily intended to incentivize key employees and give them a stake in the company’s success. The court noted the growth in the number of shareholders after the plan was implemented and the company’s emphasis on the value of employee ownership. The court considered the fact that the purchase price initially specified by the directors in granting the option rights slightly exceeded the then fair market value of the stock, which negated the idea that the rights were authorized with compensation in mind. Furthermore, the court stated, “Here it “definitely and clearly” appears that the granting of the options to petitioner in 1945, 1946, and 1947 was not intended as additional compensation for his services.” The court found that the deduction taken by the corporation on its income tax returns did not alter the essential purpose of granting the options.

    Practical Implications

    This case highlights the importance of considering the intent behind stock option grants. To determine if a stock option constitutes compensation, one must examine the substance of the transaction. The court’s emphasis on the intention of the company and the nature of the communication around the grant has significant implications for structuring and documenting equity compensation plans. When counseling clients, this case suggests that the options must be framed to create a sense of ownership. If the intention is to offer stock options as an incentive to motivate employees or as a way to offer a bonus, then the difference between the market price and option price is more likely to be considered compensation and thus taxable income. The court also clarified that the Commissioner’s interpretation of Commissioner v. Smith was too broad. This case provided the basis for a legislative response in 1950 establishing new rules for the tax treatment of employees’ stock options, which was meant to encourage the use of stock options for incentive purposes. Later cases have cited Lo Bue on the matter of discerning whether an option was compensatory or proprietary.

  • McNamara v. Commissioner, 19 T.C. 1001 (1953): Tax Implications of Compensatory Stock Options

    19 T.C. 1001 (1953)

    When an employer grants a stock option to an employee as compensation, the employee realizes taxable income at the time the option is exercised, measured by the difference between the stock’s fair market value at exercise and the option price.

    Summary

    Harley McNamara, an executive at National Tea Company, received stock options as part of his compensation package. He exercised these options in 1946 and 1947, when the fair market value of the stock exceeded the option price. The Tax Court held that the difference between the option price and the fair market value of the stock at the time the options were exercised was taxable income to McNamara as compensation. The court reasoned that the options were intended as compensation and not merely to provide a proprietary interest in the company.

    Facts

    McNamara left Kroger to become Executive Vice President at National Tea Company in March 1945.

    As part of his employment agreement, he received an option to purchase 12,500 shares of National Tea Company stock at $16 per share.

    The option vested in stages over two years, with limitations on the number of shares he could purchase at different times.

    The fair market value of the stock on the grant date was $19-$20 per share.

    McNamara exercised the options in 1946 and 1947 when the market price was significantly higher than the option price.

    National Tea Company deducted a portion of the option’s value as compensation expense in its 1945 tax return.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in McNamara’s income tax for 1946 and 1947, asserting that the difference between the fair market value of the stock and the option price was taxable income.

    McNamara petitioned the Tax Court for a redetermination of the deficiencies.

    Issue(s)

    Whether the gain derived from the exercise of the stock options was intended as compensation to McNamara?

    If the gain was intended as compensation, whether the taxable event occurred when the option was granted, or when it was exercised?

    What was the fair market value of the stock on the dates the options were exercised?

    Holding

    Yes, the gain derived from the exercise of the option was intended as compensation to McNamara because the option was part of his employment agreement and was treated as compensation by both McNamara and National Tea Company.

    The taxable event occurred when the options were exercised because the option itself was not “the only intended compensation”; the profit derived upon exercise of the option was the intended compensation.

    The fair market value was $28.50 per share on March 12, 1946, and $27.50 per share on March 6, 1947, because the court adjusted the Commissioner’s determination for 1947 based on evidence of a weaker market.

    Court’s Reasoning

    The court relied on Commissioner v. Smith, which held that any economic or financial benefit conferred on an employee as compensation is taxable income. The court found that the option was intended as compensation, noting that McNamara had requested stock options as part of his compensation package when he was recruited.

    The court distinguished the case from situations where the option itself is the only intended compensation. It emphasized that the restrictions on when McNamara could exercise the option indicated that his continued employment and the resulting increase in the company’s stock value were factors in determining the overall compensation.

    The court considered expert testimony on the value of the option but found it unpersuasive. It concluded that the intended compensation was the profit derived from exercising the option, not the value of the option itself.

    The court applied the “blockage” principle in determining the fair market value of the stock, adjusting the Commissioner’s determination for 1947 to account for the large block of shares and the weaker market conditions at that time.

    Practical Implications

    This case illustrates that stock options granted to employees are generally treated as compensation and taxed when exercised. The key factor is whether the option was granted as an incentive for performance (compensation) or merely to provide the employee with a proprietary interest in the company.

    The case emphasizes the importance of documenting the intent behind granting stock options to employees.</r

    This case highlights the importance of considering the “blockage” principle when valuing large blocks of stock for tax purposes.

    This case, while predating current IRC Sec. 83, is still relevant to understanding the foundational principles of taxing stock options as compensation.

  • Kuchman v. Commissioner, 18 T.C. 154 (1952): Determining Income from Bargain Purchase of Employer Stock

    Kuchman v. Commissioner, 18 T.C. 154 (1952)

    When an employee receives stock from their employer at a below-market price as compensation, the taxable income is determined by the difference between the option price and the fair market value of the stock on the date the option is exercised, not when the option is authorized.

    Summary

    Harold Kuchman received a stock option from his employer as compensation for services. The Tax Court addressed two issues: whether the income from the bargain purchase of stock should be measured by the difference between the option price and the market price on the date the option was authorized or exercised, and whether stock received in lieu of dividends prior to exercising the option constituted additional compensation. The court held that the income should be measured on the date the option was exercised and that the dividend equivalent stock was indeed additional compensation.

    Facts

    Harold Kuchman was an employee who received a stock option as compensation. The company authorized the option in 1944, but the option was not issued and delivered until sometime between September 27, 1945, and October 3, 1945. Kuchman exercised the option on October 3, 1945, purchasing shares at $3 per share when the market value was $33.875 per share. He also received 360 shares equivalent to dividends declared on the optioned shares before he exercised the option.

    Procedural History

    The Commissioner of Internal Revenue assessed a deficiency against Kuchman, arguing that the difference between the option price and the market value on the date the option was exercised was taxable income, and that the 360 shares were additional compensation. Kuchman petitioned the Tax Court for a redetermination.

    Issue(s)

    1. Whether the amount received as compensation for services via a bargain purchase of employer stock should be measured by the difference between the option price and the market price on the day the option was authorized or on the day the option was exercised.

    2. Whether stock purchased by the corporation and delivered to the petitioner in amounts equivalent to dividends declared on the optioned shares after the option authorization but prior to its exercise represents compensation to the petitioner in addition to the optioned shares.

    Holding

    1. No, because the option’s value is determined when exercised, not when authorized, especially when the option had restrictions and conditions making its market value indeterminable prior to exercise.

    2. Yes, because the shares were compensation for services in the amount of the fair market value of the 360 shares of stock when issued to the petitioner.

    Court’s Reasoning

    The court reasoned that the option’s value is determined at the time of exercise, not authorization. The court distinguished the case from situations where the option itself had a readily ascertainable market value when granted. The court emphasized that the option contained restrictions that prevented a clear determination of market value at the time of authorization. Citing Commissioner v. Smith, the court highlighted that an option may be considered property, but only if it has an ascertainable market value when granted. Because the option was restricted and contingent, its value was speculative until exercised. Regarding the dividend equivalent shares, the court found that they were additional compensation because they were paid in lieu of cash dividends before Kuchman became a shareholder.

    The Court noted, “An option carrying such conditions and restrictions, in our opinion, makes impossible a determination of market value.”

    Practical Implications

    This case clarifies the timing of income recognition in compensatory stock option scenarios. It emphasizes that the valuation of stock options for tax purposes generally occurs when the option is exercised, not when it is granted, particularly if the option is subject to restrictions that affect its fair market value. This ruling affects how companies structure stock option plans and how employees report income from such plans. The case also serves as a reminder that payments made to employees in lieu of dividends before they become shareholders are likely to be treated as additional compensation, subject to income tax. Later cases may distinguish Kuchman based on specific facts related to option transferability or restrictions.

  • The Western Wine & Liquor Co. v. Commissioner, 18 T.C. 10 (1952): Capital Loss Treatment for Unexercised Stock Options

    The Western Wine & Liquor Co. v. Commissioner, 18 T.C. 10 (1952)

    Gains or losses from the failure to exercise options to buy or sell property are considered short-term capital gains or losses, and, for corporations, are deductible only to the extent of capital gains.

    Summary

    The Western Wine & Liquor Co. sought to deduct as an ordinary and necessary business expense a $25,000 loss incurred when it failed to exercise an option to purchase stock. The Tax Court held that Section 117(g)(2) of the Internal Revenue Code clearly dictates that such a loss is a short-term capital loss, deductible only to the extent of capital gains. Since the company showed no capital gains for the year, no deduction was allowed. The court rejected the argument that this treatment was unduly harsh or contrary to Congressional intent.

    Facts

    Western Wine & Liquor Co. (petitioner), acting through a broker, deposited $25,000 to obtain an option to purchase stock in Chalmette. The option was to expire on June 13, 1944. Due to unspecified reasons, Western did not complete the deal by the expiration date. The option was extended for 30 days with an additional $5,000 payment made by another broker. Before the extended date, Western notified all parties that it would not purchase the stock. The option was not exercised, and the $25,000 purchase price was forfeited.

    Procedural History

    The Commissioner of Internal Revenue disallowed the petitioner’s deduction of $25,000 as an ordinary and necessary business expense. The Western Wine & Liquor Co. petitioned the Tax Court for review of the Commissioner’s determination.

    Issue(s)

    Whether the $25,000 loss from the failure to exercise the stock option is deductible as an ordinary and necessary business expense under Section 23(a)(1)(A) of the Internal Revenue Code, or whether it is a short-term capital loss under Section 117(g)(2) of the Code, deductible only to the extent of capital gains.

    Holding

    No, because Section 117(g)(2) of the Internal Revenue Code explicitly states that losses from failure to exercise options are to be treated as short-term capital losses, and the petitioner did not demonstrate any capital gains in the taxable year to offset the loss.

    Court’s Reasoning

    The court relied on the plain language of Section 117(g)(2) of the Internal Revenue Code, which states that “gains or losses attributable to the failure to exercise privileges or options to buy or sell property shall be considered as short-term capital gains or losses.” The court noted that the petitioner purchased the option in its own name and failed to exercise it, falling squarely within the statute’s terms. The court rejected the petitioner’s argument that applying Section 117(g)(2) in this case would be unduly harsh or contrary to Congressional intent. The court emphasized that its role is to interpret and apply the law as written, not to legislate. The court stated that, “If we held in accordance with petitioner’s theory, under the circumstances of this case, this Court would be stepping beyond its judicial function into the field of legislation.” The court also disallowed other deductions claimed by the petitioner due to a lack of evidence or argument presented at the hearing.

    Practical Implications

    This case clarifies the tax treatment of losses from unexercised options, particularly for corporate taxpayers. It confirms that such losses are treated as short-term capital losses, which can only be deducted to the extent of capital gains. This rule can significantly impact businesses that use options as part of their investment or hedging strategies. Tax advisors must carefully consider the capital gain/loss implications of option transactions. This ruling underscores the importance of understanding the specific provisions of the tax code and ensuring that businesses maintain accurate records of their capital gains and losses. Later cases will likely cite this as an example of strict application of the tax code.

  • Van Dusen v. Commissioner, 8 T.C. 388 (1947): Income Tax Implications of Bargain Stock Purchases by Employees

    8 T.C. 388 (1947)

    An employee realizes taxable income when they purchase stock from their employer at a bargain price, where the difference between the market price and the purchase price is considered compensation for services.

    Summary

    C.A. Van Dusen, an employee of Consolidated Aircraft Corporation, purchased company stock from the president, R.H. Fleet, at a price below fair market value, pursuant to an option agreement tied to his employment. The IRS determined that the difference between the market value and the purchase price constituted taxable income. The Tax Court agreed with the IRS, holding that the bargain purchase was compensatory in nature and therefore taxable as income under Section 22(a) of the Internal Revenue Code. This case clarifies that an economic benefit conferred on an employee as compensation is taxable, regardless of its form.

    Facts

    • C.A. Van Dusen was employed by Consolidated Aircraft Corporation as factory manager.
    • R.H. Fleet, the president of Consolidated, granted Van Dusen an option to purchase 50 shares of Fleet’s personal stock in the corporation each month at $5 per share for ten years, contingent on Van Dusen’s continued employment.
    • Van Dusen purchased shares at $5 when the market value was significantly higher.
    • Fleet did not deduct the difference between the market value and the sale price as compensation expense, but reported the difference between his basis and the $5/share as capital gain.
    • Consolidated only deducted Van Dusen’s salary.

    Procedural History

    • The Commissioner of Internal Revenue determined deficiencies in Van Dusen’s income tax for the years 1938-1941, based on the bargain stock purchases.
    • Van Dusen petitioned the Tax Court for a redetermination of the deficiencies.
    • The Tax Court upheld the Commissioner’s determination, finding the bargain purchase constituted taxable income.

    Issue(s)

    1. Whether the difference between the fair market value of the stock and the price paid by Van Dusen constituted taxable income under Section 22(a) of the Internal Revenue Code.

    Holding

    1. Yes, because the stock option was granted to Van Dusen as compensation for services rendered and to be rendered, making the difference between the fair market value and the purchase price taxable income.

    Court’s Reasoning

    The Tax Court reasoned that Section 22(a) of the Internal Revenue Code defines income broadly, encompassing any economic or financial benefit conferred on an employee as compensation. The court relied on Commissioner v. Smith, 324 U.S. 177, stating “Section 22(a) of the Revenue Act is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected.” The court found that the option was granted to induce Van Dusen to join and remain with Consolidated Aircraft Corporation, and the ability to purchase stock at a discount was directly linked to his employment. The benefit was not a gift; it was consideration for his services. Therefore, the economic benefit derived from the bargain purchase was taxable income.

    Practical Implications

    This case establishes a clear precedent that bargain stock purchases by employees can be considered taxable income if they are compensatory in nature. Attorneys advising employers should counsel them on properly structuring stock option plans to avoid unintended tax consequences for employees. Employers should clearly document whether stock options are intended as compensation or as a means for employees to acquire an ownership stake. Subsequent cases have built upon this principle, further refining the criteria for determining when a stock option constitutes compensation. This ruling has significant implications for executive compensation and the design of employee benefit programs.

  • Delone v. Commissioner, 6 T.C. 1188 (1946): Determining Basis and Amount Realized in Stock Transfers with Options

    6 T.C. 1188 (1946)

    When stock is acquired via a will subject to a binding option, the fair market value (and thus the basis) of the stock is limited to the option price, and the assumption of tax liabilities by the seller in a stock transfer agreement reduces the amount realized in the transaction.

    Summary

    Helen Delone inherited stock subject to an option agreement. She later sold the stock, assuming certain tax liabilities related to the option. The Tax Court addressed how to determine the basis of the stock and the amount realized from the sale. The court held that the basis was the option price ($100/share) because the option restricted the stock’s value. Further, the amount realized was reduced by the estate and inheritance taxes Delone assumed as part of the agreement, regardless of when those taxes were actually paid.

    Facts

    C.J. Delone willed his estate, including 2,544 shares of Revonah Spinning Mills stock, to his wife, Helen Delone. The will directed Helen to sell the Revonah stock to three named individuals (Shafer, Malcolm, and Shafer) at $100 per share. Helen also owned 865 shares of Revonah stock independently with a basis of $100 per share. The estate tax appraisal valued the Revonah stock at $125 per share. Helen and the three individuals entered into an agreement whereby Helen transferred 693 of her shares to them. She transferred her remaining 2,716 shares to Revonah for cash and preferred stock. Helen also assumed the responsibility for Federal and state estate and inheritance taxes attributable to the benefit received by the three individuals due to the option.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Helen Delone’s income tax for 1940. The Commissioner calculated gain based on a higher stock basis and did not allow a reduction for the assumed tax liabilities. Delone petitioned the Tax Court for a redetermination of the deficiency.

    Issue(s)

    1. Whether the basis of stock acquired through a will, but subject to a mandatory option to sell at a fixed price, is the estate tax value of the unencumbered stock or the option price.
    2. Whether the amount realized in a stock sale is reduced by the seller’s assumption of estate and inheritance tax liabilities related to an option agreement, even if those taxes were not paid during the taxable year.

    Holding

    1. No, because the existence of a binding option limits the fair market value to the option price.
    2. Yes, because the assumption of these liabilities is considered part of the consideration for the transaction and reduces the amount realized.

    Court’s Reasoning

    The court reasoned that Helen Delone received the stock encumbered by a binding option, which significantly affected its fair market value. Citing Helvering v. Salvage, 297 U.S. 106 (1936), the court emphasized that a binding, irrevocable option enforceable against the shareholder fixes the market value at the option price. The court stated, “We think the last stated rule applies to the instant case. Petitioner enjoyed no freedom of determination as to whether, when, or at what price to sell the shares of Revonah stock which she received under the will.” Therefore, the basis for calculating gain or loss was $100 per share, the option price. The court further held that Helen’s assumption of the estate and inheritance tax liabilities reduced the amount she realized from the sale. Even though the taxes were not paid during the tax year, her obligation to pay them was fixed by the agreement. The court likened this assumption of liability to a cash payment, stating that “the assumption of liabilities must be regarded as the equivalent of cash paid as part of the consideration for the transaction.”

    Practical Implications

    This case clarifies the valuation of assets subject to restrictions like options for tax purposes. It establishes that a binding option limits the fair market value to the option price, impacting both basis and potential capital gains or losses. The decision also highlights that assuming liabilities in a transaction can be equivalent to receiving less cash, thus reducing the amount realized. This influences how similar transactions are structured and reported, particularly in estate planning and corporate reorganizations. Later cases have cited Delone to emphasize the importance of legally binding agreements in determining fair market value and to support the principle that assumption of liabilities affects the calculation of gain or loss in taxable transactions.