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that substantially change the property. Conners v. Commissioner,
88 T.C. 541 (1987).
In Conners v. Commissioner, supra, we held that section 1038
does not require a taxpayer who reacquires land improved by the
buyer to recognize gain on the reacquisition with respect to the
improvements. In Conners, the taxpayers sold land for $10,000
cash and a $720,000 promissory note to a developer who
constructed a 48-unit town house project. The developer/buyer
defaulted on his note to the taxpayers when he could not sell all
the units. The taxpayers ultimately agreed to take title to six
units, the land underlying those units, and six forty-eighths of
the common land in lieu of exercising their right to foreclose.
The taxpayers did not report any gain upon the reacquisition.
Id. at 542-543.
In Conners, the Commissioner argued that the taxpayers were
required to recognize gain from the improvements because the
property was “substantially different from that which they sold”,
id. at 544, contending that section 1038 did not apply because,
contrary to congressional intent, the taxpayers “were in a better
position following the reacquisition”, id. at 545. However, we
found that the taxpayers were not in a better position, and that
to tax them on the improvements at that point would be to
“require the recognition of gain not yet realized, out of funds
not yet received.” Id. We held that “repossession of improved
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