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Mr. Kirst did not have record title to the Newport Beach
property at anytime prior to the submission of this case.
However, on January 23, 1997, petitioners executed a written
agreement entitled "Agreement Regarding Residential Property"
(occasionally the agreement). The agreement purports to
memorialize an oral agreement allegedly made on September 4,
1989, in which Mrs. Kirst agreed to transmute an interest in the
Newport Beach property to Mr. Kirst in exchange for certain
consideration. The preamble to this agreement indicates that
petitioners intended for it to be effective as of April 27, 1990.
Issue 1. Principal Property, Section 1034.
As a general rule, gain realized from the sale or other
disposition of property must be recognized. Sec. 1001(c).
Section 1034 provides an exception to this general rule and
allows a taxpayer to defer recognition of all or part of any gain
realized on the sale of a principal residence if other property
is purchased and used by the taxpayer as a new principal
residence within the period beginning 2 years before the date of
the sale and ending 2 years after that date (the replacement
period). Under section 1034(a), gain is recognized only to the
extent that the adjusted sales price of the old property exceeds
the cost of purchasing the new property.
Petitioners argue that Mr. Kirst purchased an interest in
the Newport Beach property, and that the amount of consideration
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