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The corporation's principal place of business is located in
a building on Golf Links Road in Oakland, California (the office
building). Petitioner owns the office building and leases it to
the corporation. During all relevant periods, petitioner was a
full-time, year-round employee of the corporation, and his place
of work was in the office building.
On November 13, 1985, petitioner purchased a residence
located on Forest Avenue in Castro Valley, California (the Castro
Valley house) for $120,666. Petitioner occupied the Castro
Valley house on that date and lived there until August 27, 1988.
On December 31, 1986, petitioner sold a residence that had been
his principal residence (former residence) prior to the purchase
of the Castro Valley house.
On his 1986 Federal income tax return, petitioner reported
the sale of the former residence on a Form 2119, Sale or Exchange
of Principal Residence. On the Form 2119, petitioner reported
that he realized gain in the amount of $59,959, based on the
$132,356 selling price of the former residence with an adjusted
basis of $72,397. Petitioner reported taxable gain of $11,690
(the difference between the $132,356 selling price of the former
residence and the $120,666 cost of the Castro Valley house) and
deferred gain of $48,269 (the difference in the $59,959 gain
realized and the $11,690 taxable gain). Petitioner reported that
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