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property to an unrelated third party and granted an option to
purchase 117 acres of the property for $3,969,000, to expire on
August 22, 1989. Petitioners intended to dispose of the property
in a section 1031 exchange for like-kind property to obtain
nonrecognition treatment of the gain realized. They knew that
they had a limited time period after the sale closed to replace
the Antioch property with like-kind property and had to identify
replacement property within 45 days.
Petitioners entered into an agreement with Clack Brothers,
Inc. (Clack Bros.), to act as an intermediary to facilitate a
like-kind exchange of the Antioch property purportedly in
accordance with section 1031 (exchange agreement). Timothy Clack
(Mr. Clack), the president of Clack Bros., is a real estate
attorney and had represented petitioners in real estate
transactions since the 1970's. Pursuant to the exchange
agreement, petitioners assigned the right to receive the Antioch
option proceeds to Clack Bros. On August 22, 1989, the option
holder exercised the option to purchase the Antioch property.
Petitioners transferred the title of the Antioch property to the
purchaser without Clack Bros.' acquiring legal title. The
purchaser paid the $3,969,000 purchase price into an escrow
account by August 22, 1989. Clack Bros. thereafter transferred
$3,862,339.65 of the proceeds into an interest-bearing trust
account in its name and used the remainder for a deposit on
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