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issues are those described in (1) and (2) above. We address each
of these issues in turn.
1. Petitioners’ Carryover Basis in the 84th Street Property
The parties appear to agree that petitioners’ basis in the
84th Street property immediately before the exchange in December
1994 was unchanged from the time the property was converted from
personal to business use in the spring of 1994. At the time of
the conversion, petitioners’ basis in the 84th Street property
was the lesser of the then fair market value or the adjusted cost
basis. See Heiner v. Tindle, 276 U.S. 582 (1928); Higgins v.
Commissioner, T.C. Memo. 1995-139; Frahm v. Commissioner, T.C.
Memo. 1974-138; sec. 1.165-9(b)(2), Income Tax Regs. Respondent
contends, and petitioners do not dispute, that the fair market
value of the 84th Street property at the time of conversion was
less than cost, which was at least $233,130.5 The question,
then, is what the fair market value of the 84th Street property
was when petitioners converted it from personal to business use.
“Fair market value” is defined as “the price at which
property would change hands between a willing buyer and a willing
seller, neither being under any compulsion to buy or to sell and
4(...continued)
exchange includes $10,668 in closing costs.
5 This amount represents petitioners’ total investment in
the 84th Street property (i.e., the $183,000 paid by petitioners
to purchase the property plus the approximately $50,130 they
spent to improve the property).
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