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within the replacement period?” Petitioners checked the box on
line 9 labeled “Yes”. The Form 2119 further stated: “If line 9
is ‘Yes,’ stop here, attach this form to your return, and see
Additional Filing Requirements.” Petitioners did not make any
additional entries on the remainder of the Form 2119.
On May 26, 1998, petitioners filed with respondent a second
Form 2119. In part I of the Form 2119 petitioners reported that
they: (1) Sold the Solvang property on August 4, 1995; (2)
realized a gain of $508,285 on the sale; and (3) purchased a new
main home on July 18, 1997, at a cost of $480,536. Petitioners
completed part II of the Form 2119 electing the one-time
exclusion of $125,000 of gain on the sale of a principal
residence for people age 55 or older under section 121.
Petitioners also completed part III of the Form 2119 deferring
recognition of the remaining $383,285 of gain (i.e., $508,285
minus $125,000) under section 1034.
On March 20, 2001, respondent issued to petitioners a notice
of deficiency for 1995. In the notice, respondent determined
that petitioners were liable for a tax deficiency of $148,415, an
accuracy-related penalty under section 6662(a) of $29,683, and an
addition to tax under section 6651(a)(1) of $7,200.75. In
particular, respondent determined that the gain that petitioners
realized upon the sale of the Solvang property was required to be
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