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II. Disputed Adjustments
A. Sale of Mukilteo Condominiums
On or about November 13, 1981, petitioner purchased five
condominium units located in Mukilteo, Washington (the five
units). Petitioner owned those units as rental properties. On
or about January 25, 1989, petitioner transferred the five units
to Great American First Savings Bank (Great Bank) in conjunction
with the settlement of potential litigation regarding purported
soil erosion affecting those properties. Attached to the 1989
tax return is a “Statement of Involuntary Conversion”, which
relates to the five units. That statement shows a gain in the
amount of $89,3391 on the disposition of the five units and
provides that the taxpayer intends to acquire replacement
property and “to defer the gain realized by the involuntary
conversion” of the five units.
In the notice of deficiency, respondent adjusted the amount
realized on the sale of the five units by increasing the amount
of the settlement proceeds from $206,009 to $210,500 and adjusted
petitioner's adjusted basis in the five units by decreasing
petitioner's initial, cost basis from $228,067 to $222,242.
Respondent determined that, after taking into account
depreciation and other items, petitioner realized gain on the
1 For simplicity, figures have been rounded to the nearest
dollar, and, thus, in some of the calculations to follow, there
are some minor discrepancies.
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