Robert K. and Dawn E. Lowry - Page 1

                                 T.C. Memo. 2003-225                                  

                               UNITED STATES TAX COURT                                

                    ROBERT K. AND DAWN E. LOWRY, Petitioners v.                       
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No.  11579-00.             Filed July 30, 2003.                 

                    Ps realized a sec. 1231, I.R.C., gain when a                      
               partnership of which P husband was a 50-percent owner                  
               conveyed rental property to the holder of a security                   
               deed on the property in satisfaction of the loan                       
               obligation.  Ps assert that the gain should be                         
               recognized in 1993, because the lender issued a Form                   
               1099-A indicating that the lender had acquired the                     
               property on Dec. 15, 1993, the partnership executed a                  
               grant deed, and the lender executed a covenant not to                  
               sue, both dated Dec. 15, 1993.  In the same month, the                 
               partnership and the lender issued escrow instructions                  
               to a title company, under which the grant deed and                     
               covenant not to sue were delivered in escrow pending a                 
               subsequent closing of title.  Title closed in 1994.  Ps                
               did not disclose the gain on either their 1993 or 1994                 
               Federal income tax returns.  Held:  Ps’ sec. 1231,                     
               I.R.C., gain must be recognized in 1994.  Held,                        
               further, Ps are liable for the sec. 6662(a),                           

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