Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-72

1973-1 C.B. 368

Sec. 1033

IRS Headnote

The nonrecognition-of-gain provisions are not available to a sole shareholder who, in the complete liquidation of his corporation following condemnation of its property, received the condemnation proceeds awarded the corporation and reinvested them in similar property.

Full Text

Rev. Rul. 73-72

Advice has been requested whether the nonrecognition-of-gain provisions of section 1033 of the Internal Revenue Code of 1954 are applicable under the circumstances described below.

A, an individual, is the sole shareholder of M, a domestic corporation which owns and rents improved commercial real property.

In September 1968, M's improved commercial real property was condemned by the State of X. In January 1969, an agreement was made with the State on the amount of the condemnation award and the same was paid over to M. In March 1969, M distributed all its assets, including the funds representing the condemnation award, to A in redemption of all the M stock and in complete liquidation of M pursuant to section 331 of the Code. In April 1969, A used the proceeds of the condemnation award received in the liquidation of M to purchase improved commercial real property similar in nature to the property involuntarily converted by M.

The question presented is whether the nonrecognition-of-gain benefits under the provisions of section 1033 of the Code apply to the distribution in liquidation of M's condemnation award, since A used these funds to purchase property similar in nature to the property of M that was condemned.

Section 1033(a) of the Code provides, in part, that if property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into money and if the taxpayer, during the period specified in section 1033(a)(3)(B)(i) of the Code, for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, then the gain, at the election of the taxpayer, shall be recognized only to the extent that the amount realized upon such conversion exceeds the cost of such other property.

Revenue Ruling 66-191, 1966-2 C.B. 300, involves an involuntary conversion of livestock owned by a partnership. The ruling holds that the nonrecognition of gain election under section 1033(a) of the Code can only be made by the partnership and not by the partners individually and that a purchase of qualified property by one of the partners does not constitute a replacement by the partnership.

Similar rationale is applicable in the instant case. Therefore, M is the particular taxpayer whose property was condemned and it is M who must make the replacement in order to have the nonrecognition-of-gain provisions of section 1033 of the Code apply. Accordingly, under the facts of the instant case A is not entitled, under section 1033 of the Code, to defer the recognition of gain upon liquidation of the corporation. And, since M did not replace the condemned property, it is not entitled, under section 1033, to defer the recognition of gain from the condemnation. See Rev. Rul. 55-517, 1955-2 C.B. 297.