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That provision also was discussed thoroughly in the "Shore sale" thread that begins with post no. 15194. My original thought was that the income was "recognized" but then excluded. After posting a question to Kaye Thomas at I was given to understand that your interpretation is correct. I understand that Roy will revisit this issue in the next week or two, and I'll look forward to seeing his further comments.

Bob, I think your original thoughts on this were correct. Clearly, Sec. 121 isn't a non-recognition provision, like, e.g., Sec. 351 or Sec. 721. Rather, it allows for the exclusion of recognized gain up to a certain amount. However, I think the intent of the provision was not to allow the deemed sale followed by the exclusion. This discussion is really interesting (and credit is due to you, Bob, for catching this drafting error/loophole a long time ago and running through the discussion here, though I do believe Roy when he says that he innocently forgot your involvement).
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