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The purchase of these three replacement properties exhausted
all but $205.45 of the escrow funds. By check dated May 9, 1995,
Lewis paid petitioner the $205.45 balance.
Petitioners are cash basis taxpayers. On their joint 1994
Federal income tax return, filed on or about April 15, 1995, they
characterized the subject transaction as a like-kind exchange of
“Timber” for “Timber and Land”, giving rise to $496,076 realized
gain, all of which they treated as deferred gain pursuant to
section 1031.
In the notice of deficiency, dated December 4, 1997,
respondent determined that petitioners realized gain of $489,935,
instead of $496,076, from their 1994 timber sale.2 The notice of
deficiency states that “the realized gain from the sale of the
timber is to be fully recognized [in 1994] because it has not
been established that the requirements of section 1031 of the
Internal Revenue Code have been met.”
OPINION
A. The Parties’ Contentions
1. The Like-Kind Exchange Requirement
Petitioners argue that to continue petitioner’s timber
investment, he exchanged standing timber for standing timber that
2 The parties have stipulated that petitioner’s basis in the
timber conveyed to Rayonier was $3,200. On brief, respondent
contends that after subtracting this basis, the amount of
petitioners’ realized gain is $486,735.
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