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If petitioner sold an office building on January 1, 1994,
for a price equal to the building’s fair market value on
January 1, 1987, petitioner would not realize gain or incur tax
on the sale of the building because petitioner would have been
allowed to step up the building’s tax basis to its January 1,
1987, fair market value. Under respondent’s interpretation,
however, if on January 1, 1994, the building was uninsured and
was totally destroyed by fire, and if petitioner claimed a
deduction under section 165 relating to the casualty loss
associated with the fire, petitioner would not be allowed to
utilize the January 1, 1987, stepped-up basis in the building
because such loss was caused by a fire, not by a sale or
exchange. This latter result (in which petitioner, as a taxable
entity for 1994, would be taxed on the pre-1987 appreciation in
the building) would be inconsistent with the overall purpose of
TRA 1986 section 1012(c)(3)(A)(ii) to not tax such appreciation.8
We conclude that the basis step-up provision of TRA 1986
section 1012(c)(3)(A)(ii) applies not just to sale or exchange
8 We also note that respondent’s legal position is contrary
to one of respondent’s own legal advice memoranda. In Tech. Adv.
Mem. 95-33-003 (Aug. 18, 1995, and not since revoked or
withdrawn), the language of the basis step-up provision of TRA
1986 sec. 1012(c)(3)(A)(ii) is construed by respondent as not
limited by the “sale or exchange” language of the legislative
history and as including an “abandonment” of computer software.
Also, in Field Service Advice 2000-01-002 (Jan. 7, 2000),
respondent reiterated the same legal interpretation of TRA 1986
sec. 1012(c)(3)(A)(ii) and concluded generally that the basis
step-up provision was not limited to sale or exchange
transactions.
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