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Principal Residence) (Form 2119) that was included as part of
their 1986 return that they sold the Roslyn residence for
$500,000, had a basis in it of $155,500, realized a gain of
$344,500 from its sale, and planned to replace it within the
"replacement period". Consequently, the Gordons did not include
any portion of that gain in the income that they reported in
their 1986 return.
In a statement that was attached to their 1987 return, the
Gordons indicated that they had incurred a net operating loss for
1987 in an undisclosed amount and that, pursuant to section
172(b)(3)(C), they were making an election to relinquish the
carryback of that loss.
During August 1987, the IRS initiated an examination of the
Gordons' 1986 return. Around 1988, a revenue agent met with B&S
and examined the Gordons' 1986 return and certain documents
relating to that return that B&S had maintained. He also re-
quested a meeting with Mr. Gordon in order to discuss his 1986
net trading loss. Based on her conversations with Mr. Gordon,
Ms. Gordon was aware that the 1986 return was being examined by
the IRS. On October 14, 1988, Mr. Gordon met with the IRS
revenue agent who was examining the Gordons' 1986 return and
described to him the nature of his activities as an options
market maker on the AMEX. At the conclusion of that meeting,
that agent told Mr. Gordon that his 1986 net trading loss was
properly treated as an ordinary loss in the Gordons' 1986 return
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