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After Mr. Welch learned during November 1991 that petitioner
was being audited by respondent, he attempted to record the
quitclaim deed from Mr. Hernandez to himself for the interest in
lot 2160. Mr. Welch testified that he realized $165,000 of gain
from the sale of lot 2160, but he did not report the transaction
on his 1989 Federal tax return. Mr. Welch explained that he did
not report the sale of lot 2160 because petitioner's $258,351.54
was ultimately invested in Mr. Welch's magazine.
Petitioner, on his 1989 Federal income tax return, reported
a "Tax-Deferred Exchange" under section 1031, reflecting the lot
2160 property with a $305,000 fair market value, as the property
received in the exchange. Petitioner reflected a $44,596 basis
in lot 2160, and no gain was recognized from the sale of the
Virgil and Harrington properties. Petitioner’s 1989 return was
filed after petitioner became aware that lot 2160 had virtually
no value.
Petitioner sold real property at 508 Marsalis during 1984
and reported the sale on the installment basis. For the 1985
through 1989 taxable years, petitioner was entitled to and
received interest on the note connected with the 508 Marsalis
sale, but he failed to report any of the interest on his 1985
through 1987 income tax returns. Petitioner reported only one-
half of the interest received for 1988 and 1989. When confronted
by respondent's agent concerning the interest, petitioner told
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