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$10,700,878 in realized gain from the Royal Towers transaction
(after deducting claimed selling expenses of $560,616).
III. Notice of Deficiency
In the notice of deficiency, respondent determined that
petitioner must recognize $12,041,026 in gains, which consists of
the gains that Teruya deferred on its Federal income tax return
for its taxable year ending March 31, 1996.6
Discussion
This case presents an issue of first impression regarding
the application of section 1031(f), which restricts
nonrecognition of gain or loss with respect to like-kind
exchanges between related persons.7
I. General Requirements for Like-Kind Exchanges
Section 1031(a)(1) generally provides that no gain or loss
shall be recognized on the exchange of like-kind properties held
for productive use in a trade or business or for investment.
Under certain conditions, a taxpayer’s nonsimultaneous transfer
and receipt of like-kind properties may qualify for section 1031
6 The deferred gains from the Ocean Vista and Royal Towers
transactions that the parties stipulated total $12,046,047. The
parties do not explain the seeming discrepancy between this
figure and the $12,041,026 adjustment in the notice of
deficiency.
7 The examination in this case commenced in November 1997.
Consequently, the burden of proof rule of sec. 7491(a)(1) does
not apply. Internal Revenue Service Restructuring and Reform Act
of 1998, Pub. L. 105-206, sec. 3001(c), 112 Stat. 727.
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