Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-37

1968-1 C.B. 359

Sec. 1033

IRS Headnote

Where a taxpayer is awarded severance damages in a condemnation proceeding for damage done to a specific portion of his retained property, only the basis of that portion of the property is reduced by the severance damages received in determining the amount of gain realized.

G.C.M. 23698. C.B. 1943, 340, amplified.

Full Text

Rev. Rul. 68-37

Advice has been requested whether severance damages awarded in a condemnation proceeding for damage done to only a portion of the retained property can be deducted from the basis of all of the retained property in determining the amount of gain realized. A taxpayer owned 626 acres of land. As a result of a condemnation proceeding, the condemning authority took 26 acres for a new highway. In addition to being compensated for the 26 acres taken, the taxpayer received severance damages based on the fact that the 26 acres taken for the highway left 100 of the remaining 600 acres completely isolated from the rest of the property and is not accessible by any existing road. The 500 acre trace of land did not suffer any damage as a result of the condemnation.

Severance damages are analogous to the proceeds of property insurance; they represent compensation for damage to property. Rev. Rul. 271, C.B. 1953-2, 36.

G.C.M. 23698, C.B. 1943, 340, states that any amount awarded in a condemnation proceeding as severance damages is to be deducted from that part of the basis of the whole property which is properly allocable to the retained portion and, if in excess thereof, the amount of the excess constitutes taxable gain.

Consistent with the definition of severance damages the words `retained portion' as used in G.C.M. 23698 mean property which has actually been damaged as a result of a condemnation proceeding.

Accordingly, where the facts and circumstances indicate that damages awarded in a condemnation proceeding are based upon damage to a certain portion of the retained property, only the basis properly allocable to that portion is reduced by the severance damages received, and any excess is taxable gain. Thus, in the instant case, since only 100 acres of the taxpayer's retained property was damaged as a result of the condemnation of a portion of his land, only the basis properly allocable to that portion of the property is reduced by the severance damages and any excess is taxable gain.

G.C.M. 23698 is amplified.