Teruya Brothers, Ltd. & Subsidiaries - Page 11

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          provisions of section 1031(a) do not apply.  Instead, any gain or           
          loss must be taken into account as of the date of the                       
          disposition.  As one of the few enumerated exceptions to this               
          rule, section 1031(f)(2)(C) provides that a disposition of                  
          exchanged property will not be taken into account if “it is                 
          established to the satisfaction of the Secretary that neither the           
          exchange nor such disposition had as one of its principal                   
          purposes the avoidance of Federal income tax.”8                             
               It is undisputed that Times and Teruya were related persons            
          within the meaning of the statute.9  Respondent makes no                    
          argument, however, that section 1031(f)(1) applies directly to              
          the Ocean Vista and Royal Towers transactions.10  Instead,                  
          respondent argues that petitioner has run afoul of section                  
          1031(f)(4), which provides:  “This section [1031] shall not apply           
          to any exchange which is part of a transaction (or series of                

               8 Other exceptions, not implicated here, apply to                      
          dispositions after the death of the taxpayer or related party,              
          see sec. 1031(f)(2)(A), and to involuntary conversions, see sec.            
               9 A related person is any person bearing a relationship to             
          the taxpayer described in sec. 267(b) or 707(b)(1).  Sec.                   
               10 Respondent appears to acknowledge implicitly that sec.              
          1031(f)(1) applies only in the case of a direct exchange between            
          related persons and that this case does not involve such a direct           
          exchange.  Consistent with such a view, the regulations provide             
          that a “qualified intermediary is not considered the agent of the           
          taxpayer for purposes of section 1031(a).”  Sec. 1.1031(k)-                 
          1(g)(4)(i), Income Tax Regs.                                                

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Last modified: May 25, 2011