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We accept the structure of the transaction as cast by
petitioners. The substance of the transfer of the Escondido
property from petitioner to Balmac comports with the form of a sale
transaction. Consequently, we sustain respondent's determination
that petitioner sold the Escondido property to Balmac.
Having determined that a sale occurred, we turn to the tax
consequences flowing from petitioner's sale to Balmac. The
purchase price for the Escondido property was $7 million. At
closing Balmac paid $2 million in cash and gave a $5 million
installment note. Security for the note was reconveyed to Balmac
in 1986, and there is no evidence that any obligation to pay the
note remained. The reconveyance of the note amounts to a
cancellation of the note. The cancellation requires recognition
of gain of $4,121,930 under section 453B(a) and (f) in 1986.5
5 Sec. 453B(a) provides in part:
SEC. 453B(a). General Rule.--If an installment
obligation is satisfied at other than its face value or
distributed, transmitted, sold, or otherwise disposed
of, gain or loss shall result to the extent of the
difference between the basis of the obligation and--
* * * * * * *
(2) the fair market value of the
obligation at the time of distribution,
transmission, or disposition, in the case of
the distribution, transmission, or
disposition otherwise than by sale or
exchange.
Sec. 453B(f) provides:
(continued...)
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