Shizuo George Kurata - Page 4

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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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