A landowner and a developer signed a combination agreement to build an office tower. A cautionary note was recorded in favor of the developer. The developer did not build the building, but for 18 years acted as the owner of the property: demolished an old structure, promoted a zoning plan that significantly increased the land's value, rented the area as a parking lot and there were numerous financial settlements between the parties. After 18 years, the parties signed an agreement to "cancel" the combination agreement and immediately thereafter, the landowners sold the entire land to a third party. The Director of Real Estate Taxation refused to recognize the tax-exempt cancellation and determined that it was a taxable "repurchase".
The Court held that this is not a cancellation of a transaction but a repurchase subject to tax. Section 102 of the Israeli Real Estate Taxation Law allows a tax refund for a canceled transaction, but the main test is whether the transaction "took root in reality". In a case where the transaction had factual and practical implications that cannot be uprooted, the clock cannot be turned back, and the termination of the relationship will be deemed a new transaction (repurchase). The burden of proof that it is a genuine cancellation lies with the taxpayer. Here, 18 years have passed since the agreement was signed, a cautionary note was recorded, and the developer carried out significant actions such as demolition, planning betterment, and renting. The totality of these actions indicates that the transaction was well absorbed into reality, yielded fruit, and cannot be ignored as if it never existed. Therefore, the combination agreement was not canceled retroactively but repurchased and is subject to tax.