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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.
1031(f)(2)(B).
9 A related person is any person bearing a relationship to
the taxpayer described in sec. 267(b) or 707(b)(1). Sec.
1031(f)(3).
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