Problem:
A new client (husband and wife) bought a commercial property in their names and put it into service in 1979. They subsequently incorporated and contributed it to the corporation in August 2003 but for some reason their S-election was valid as of January 1, 2004. On the 2004 corporate return a built in gain of 565,000 was reported.
Sometime in October of 2009 they exchanged the property for a two family residence. However, they only rolled half the proceeds from the sale of the commercial property into the replacement property and took a note for the other half.
In addition, when they purchase the replacement property they added an additional 260k of their own funds for the purchase. However, this additional cash for the purchase of the replacement property was not recorded on the books or tax returns.
The note is for ten years but they did not report any gain in 2009 and 2010 or any built in tax due even though they collected on the notes.
They changed accountants and while he reported the gain on the installment sale he did not report any built in gains tax was due.
When we indicated to the client that they would owe a built in gain tax they were startled and insists that we confirm our opinion.
In 2009 the BIG tax waiting period was 7 years which they had not reached. Is there any reason that the built in gains tax would not have been triggered? if not can the damage be mitigated? Any Ideas on how we should proceed?
By the way the client has said they would not file amended returns for the prior years.
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James Diapoules
CPA
DIAPOULES & FEINSTEIN, PC
Melville NY
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