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In August 1995, Teruya entered into an “exchange agreement”
with T.G. Exchange, Inc. (TGE), whereby TGE agreed to act as an
“exchange party to complete the exchange” of Ocean Vista for
replacement property to be designated by Teruya, with the stated
purpose of qualifying the exchange under section 1031. TGE
agreed to acquire the replacement property with proceeds from the
sale of Ocean Vista and additional funds from Teruya as necessary
to effect the acquisition. Paragraph 6 of the exchange agreement
states:
Notwithstanding the foregoing, if * * * [Teruya] is
unable to locate suitable Replacement Property by the
date specified in the Acquisition Agreement [for Ocean
Vista], then the Acquisition Agreement and this
Exchange Agreement shall be terminated and the parties
shall have no further obligations to each other * * *.
Pursuant to the exchange agreement, Teruya transferred Ocean
Vista to TGE, and on September 1, 1995, TGE sold Ocean Vista to
the Association for $1,468,500. At that time, Teruya had a
$93,270 basis in Ocean Vista.
Also on September 1, 1995, TGE applied the proceeds from the
sale of Ocean Vista, as well as $1,366,056 in additional cash
from Teruya, to acquire Kupuohi II from Times for $2,828,000.
Times had a $1,475,361 adjusted basis in Kupuohi II and
recognized a $1,352,639 gain on the sale.3
3 The parties have stipulated that Times had a $1,475,633
basis in Kupuohi II at the time of its sale; however, this number
yields computational inconsistencies with respect to other
(continued...)
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