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with respect to the reacquired property as circumstances will
permit. Section 1038(c)10 recalculates petitioner’s basis in the
reacquired property to account for the original, presale basis
that the seller had in the property, plus other adjustments such
as sales costs, as reflected in the seller’s basis in the debt
instrument under section 453, see sec. 1.453-9(b)(2), Income Tax
Regs., plus the gain reported under section 1038(b), sec.
1038(c)(1), gain reported in prior taxable years, sec.
1038(c)(2), and any amounts paid in connection with the
reacquisition, sec. 1.1038-1(g)(1)(iii), Income Tax Regs. The
operation of these two subsections leaves the seller having paid
all Federal taxes due on cash and other property received prior
to reacquisition, and in possession of his original property with
an increased basis.
In light of the foregoing, we hold that section 1038 governs
petitioner’s reacquisition of the real property at 225-235 Boston
Avenue in satisfaction of the indebtedness arising from its sale,
sec. 1.1038-1(a), Income Tax Regs. Section 1038 governs the
entire reacquisition even though the property has been
substantially changed through incomplete modifications to both
the erstwhile furniture store and the structure on the rear
10 There is conflicting evidence in the record with respect
to petitioner’s basis in the parking structure at the time of the
1988 sale, which will have a direct bearing on the calculation of
petitioner’s post-reacquisition basis in the property under sec.
1038(c).
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