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Exchange Property. The subdivision agreement for Tract No. 22332
was approved by the Beaumont City Council on February 13, 1990.
Around June/July 1989, Meadowlark Homes, a successor in
interest to Elkhorn, began to install the off-site improvements
for the Exchange Property. Meadowlark Homes initially estimated
$480,000 ($10,000 per lot) as the cost for off-site improvements.
In a letter dated June 14, 1989, the Beaumont-Cherry Valley
Water District informed Meadowlark Homes of a proposed increase
in water connection fees, but gave Meadowlark Homes an
opportunity to obtain the connections at the existing rate. On
June 20, 1989, Meadowlark Homes purchased the water connections
at the existing lower rate.
Around September/October 1989, Meadowlark Homes began
construction of the 48 houses. Meadowlark Homes first built 24
houses, which were sold for an average price of $140,000. Next,
Meadowlark Homes built the second set of 24 houses, but sales of
these houses were slower then the first 24 due to a drop in the
market at the end of 1990. Ultimately, Meadowlark Homes made a
profit of about $630,000 on the sale of the 48 homes.
Tax Return and Accounting Information
Petitioner realized a $428,806 gain from the sale of the
Exchange Property. This gain was reported on line 7 of Schedule
M-1 attached to petitioner's 1989 return. Respondent in his
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