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The operation of section 1038(b) and (c) illustrates why it
is appropriate that petitioner should be liable for income tax on
hitherto untaxed amounts received prior to the reacquisition. In
1988, petitioner recognized $336,192 of the $719,480 received as
part of the consideration for the sale of the 225-235 Boston
Avenue property and deferred the balance under section 453(c).
Section 1038(b)(1) requires the recognition of that balance,
$383,288, up to the limit imposed by section 1038(b)(2) of the
original sale price less petitioner’s claimed presale basis, or
$1,186,343.9 Section 1038(b) ensures that all receipts of cash
and other property by the seller prior to reacquisition are taxed
as income to return the seller to as close to status quo ante
8(...continued)
market value of the property. If the 1988 sale were analyzed as
the sale of an option to buy the 225-235 Boston Avenue property,
the overall Federal tax consequences would be similar to the
operation of sec. 1038, although the timing of recognition and
adjustment to basis would differ. Only when an option lapses
does the grantor of an option include in gross income the amount
received for the option, id. at 763, Koch v. Commissioner, 67
T.C. 71, 82 (1976); see also Rev. Rul. 78-182, 1978-1 C.B. 265,
267; Rev. Rul. 58-234, 1958-1 C.B. 279, 283, as short-term
capital gain, sec. 1234(b)(1). The option grantor retains his
property with its basis unchanged. The more favorable treatment
of a seller who reacquires real property under sec. 1038 in terms
of allowed adjustments to basis belies petitioner’s argument that
sec. 1038 is unconstitutional in its application to the facts of
his case. See also Greene v. Commissioner, 76 T.C. 1018 (1981).
9 Sec. 1038(b)(2) limits the amount required to be
recognized under sec. 1038(b)(1) to the amount by which the sale
price exceeds the sum of: (1) presale basis; (2) amounts
previously recognized; and, (3) amounts paid in connection with
the reacquisition (in this case, nothing) ($2,710,000 -
(1,187,465 + 336,192 + 0) = 1,186,343).
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