Title 26 Chapter 1 "forthwith" to apply for and receive permission to establish a replacement fund in every case where it is not possible to replace immediately. If an expenditure in actual replacement would be too late, a request for the establishment of a replacement fund would likewise be too late. § 1.1033 (a)-4 Replacement funds where disposition of the converted property occurred before January 1, 1951. (a) This section applies only with respect to involuntary conversions where the disposition of the converted property (as defined in § 1.1033 (a)-3) occurred before January 1, 1951, and where the proceeds are received in a taxable year to which the Internal Revenue Code of 1954 applies. (b) In any case where the taxpayer elects to replace or restore the converted property but it is not practicable to do so immediately (for example, because of a shortage of materials or an industrywide strike), he may obtain permission to establish a replacement fund in his accounts in which part or all of the compensation so received shall be held, without deduction for the payment of any mortgage. In such a case the taxpayer should make application on Form 1114 to the district director for the internal revenue district in which his return is required to be filed for permission to establish such a replacement fund, and in his application should recite all the facts relating to the transaction and de clare that he will proceed as expeditiously as possible to replace or restore such property. The taxpayer will be required to furnish a bond with such surety $ 1.1033(b)-1 § 1.1033 (b) -1 Involuntary conversion of principal residence. Section 1033 shall apply in the case of property used by the taxpayer as his principal residence if the destruction, theft, seizure, requisition, or condemnation of such residence, or the sale or exchange of such residence under threat or imminence thereof, occurs before January 1, 1951, or after December 31, 1953. However, section 1033 shall not apply to the seizure, requisition, or condemnation (but not destruction), or the sale or exchange under threat or imminence thereof, of such residence property if the seizure, requisition, condemnation, sale, or exchange occurs after December 31, 1957, and if the taxpayer properly elects under section 1034(1) (2) to treat as the district director may the transaction as a sale (see paragraph require in an amount not in excess of double the estimated additional income taxes which would be payable if no replacement fund were established. See 6 U.S.C. 15, providing that where a bond is required by law or regulations, in lieu of surety or sureties there may be deposited bonds or notes of the United States. The estimated additional taxes, for the amount of which the applicant is required to furnish security, should be computed at the rates at which the ap plicant would have been obliged to pay, taking into consideration the remainder (h) (2) (ii) of § 1.1034-1). Section 1033 shall not apply in the case of an involuntary conversion of property used by the taxpayer as his principal residence if the destruction, theft, seizure, requisition, or condemnation of such residence, or the sale or exchange of such residence under threat or imminence thereof, occurred after December 31, 1950, and before January 1, 1954. In the case of property disposed of after December 31, 1950, and before January 1, 1954, which is used by the taxpayer partially as a principal residence and partially for of his taxable (or net) income and re- other purposes, proper allocation shall 435 $ 1.1033(a)-3 Title 26 Chapter I sion of property described in section 1033, no gain is recognized if the provisions of that section are complied with. If any part of the money received as a result of such an involuntary conversion is not expended in the manner provided in sec (a) (2), the gain, if any, is pays example, tion 1033 recognized to the extent of the money which is not so expended. For a vessel purchased by A in 1949 for $100,000 is destroyed by a typhoon in 1950, and A receives in 1954 insurance in the amount of $100,000. This money is not expended in the manner provided in section 1033 (a) (2), but there is no gain since the insurance does not exceed the basis (disregarding, for the purposes of this example, the adjustment for depreciation) In 1955, A receives insurance from a second policy of $200,000 on account of the destruction of the vessel. He expends this amount in the manner provided in section 1033 (a) (2). The gain in 1955 upon the receipt of the $200,000 is recognized to the extent of $100, 000, the amount of the money received in 1954 which was not expended in the manner provided in section 1033 (a) (2). (2) Losses from involuntary conversions are recognized or not recognized without regard to section 1033. The expenditure in the manner provided in section 1033 (a) (2) of money received upon an involuntary conversion is not necessary for the transaction to be considered completed for the purpose of determining such loss. (c) In order to avail himself of the benefits of section 1033 (a) (2) it is not sufficient for the taxpayer to show that subsequent to the receipt of money from a condemnation award he purchased other property similar or related in use. The taxpayer must trace the proceeds of the award into the payments for the property so purchased. It is not necessary that the proceeds be earmarked, but the taxpayer must be able to prove that the same were actually reinvested in such other property similar or related in use to the property converted. The benefits of section 1033 (a) (2) cannot be extended to a taxpayer who does not gross an award sufficient funds to satisfy liens (other than liens due to special assessments levied against the remaining portion of the plot or parcel of real estate affected for benefits accruing in connection with the condemnation) and mortgages against the property and itself the same, the amount so retained shall not be deducted from the award in determining the amount of the net award. If, in a condemnation proceeding, the Government makes award to a mortgagee to satisfy a mortgage on the condemned property, the amount of such award shall be considered as part of the "money" into which the property is converted, regardless of whether or not the taxpayer was personally liable for the mortgage debt. Thus, if a taxpayer has acquired property worth $100,000 subject to a $50,000 mortgage (regardless of whether or not he was personally liable for the mortgage debt) and, in a condemnation proceeding, the Government awards the taxpayer $60,000 and awards the mortgagee $50,000 in satisfaction of the mortgage, the entire $110,000 is considered to be the "money" into which the property was converted. An amount expended for replacement of an asset, in excess of the recovery for loss, represents a capital expenditure and is not a deductible loss for income tax purposes. (e) The provisions of section 1033 (a) (2) are applicable to property used for residential or farming purposes. (f) The proceeds of a use and occupancy insurance contract, which by its terms insured against actual loss sustained of net profits in the business, are not proceeds of an involuntary conversion but are income in the same manner that the profits for which they are substituted would have been. (g) There is no investment in property similar in character and devoted to a similar use if (1) The proceeds of unimproved real estate, taken upon condemnation proceedings, are invested in improved real estate. (2) The proceeds of conversion of real purchase other property similar or re- property are applied in reduction of in lated in service or use, notwithstanding the fact that there was no other such property available for purchase. (d) If, in a condemnation proceeding, the Government retains out of the debtedness previously incurred in the purchase of a leasehold. (3) The owner of a requisitioned tug uses the proceeds to buy barges. (h) It is incumbent upon a taxpayer 434 Title 26 Chapter I return is not filed with such district director, then such notification shall be made to such district director at the time of filing this return. If the taxpayer so desires, he may, in either event, also notify such district director before the filing of such return. (6) If a taxpayer makes an election under section 1033 (a) (3) and the replacement property or stock was purchased before the beginning of the last taxable year in which any part of the gain upon the conversion is realized, any deficiency, for any taxable year ending before such last taxable year, which is attributable to such election may be assessed at any time before the expiration of the period within which a deficiency for such last taxable year may be assessed, notwithstanding the provisions of section 6212 (c) or 6501 or the provisions of any law or rule of law which would otherwise prevent such assessment. (7) If the taxpayer makes an election under section 1033 (a) (3), the gain upon the conversion shall be recognized to the extent that the amount realized upon such conversion exceeds the cost of the replacement property or stock, regardless of whether such amount is realized in one or more taxable years. (8) The proceeds of a use and occupancy insurance contract, which by its terms insured against actual loss sustained of net profits in the business, are not proceeds of an involuntary conversion but are income in the same manner that the profits for which they are substituted would have been. (9) There is no investment in property similar in character and devoted to a similar use if (i) The proceeds of unimproved real estate, taken upon condemnation proceedings, are invested in improved real estate. (ii) The proceeds of conversion of real property are applied in reduction of indebtedness previously incurred in the purchase of a leasehold. (iii) The owner of a requisitioned tug uses the proceeds to buy barges. (10) If, in a condemnation proceeding, the Government retains out of the award sufficient funds to satisfy special assessments levied against the remaining portion of the plot or parcel of real estate affected for benefits accruing in connection with the condemnation, the amount so retained shall be deducted $ 1.1033(a)-3 from the gross award in determining the amount of the net award. (11) If, in a condemnation proceeding, the Government retains out of the award sufficient funds to satisfy liens (other than liens due to special assessments levied against the remaining portion of the plot or parcel of real estate affected for benefits accruing in connection with the condemnation) and mortgages against the property, and itself pays the same, the amount so retained shall not be deducted from the gross award in determining the amount of the net award. If, in a condemnation proceeding, the Government makes an award to a mortgagee to satisfy a mortgage on the condemned property, the amount of such award shall be considered as a part of the "amount realized" upon the conversion regardless of whether or not the taxpayer was personally liable for the mortgage debt. Thus, if a taxpayer has acquired property worth $100,000 subject to a $50,000 mortgage (regardless of whether or not he was personally liable for the mortgage debt) and, in a condemnation proceeding, the Government awards the taxpayer $60,000 and awards the mortgagee $50,000 in satisfaction of the mortgage, the entire $110,000 is considered to be the "amount realized" by the taxpayer. (12) An amount expended for replacement of an asset, in excess of the recovery for loss, represents a capital expenditure and is not a deductible loss for income tax purposes. [T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6679, 28 F.R. 10515, Oct. 1, 1963; T.D. 7075, 35 F.R. 17996, Nov. 24, 1970] § 1.1033 (a)-3 Involuntary conversion where disposition of the converted property occurred before January 1, 1951. (a) This section applies only with respect to involuntary conversions where the disposition of the converted property occurred before January 1, 1951, and where the proceeds are received in a taxable year to which the Internal Revenue Code of 1954 applies. The term "disposition of the converted property" means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation. (b) (1) Upon the involuntary conver 453 § 1.1033(a)-2 Title 26 Chapter I quired period of time, or replacement is made at a cost lower than was anticipated at the time of the election, or a decision is made not to replace, the tax liability for the year or years for which the election was made shall be recomputed. Such recomputation should be in the form of an "amended return". If a decision is made to make an election under section 1033 (a) (3) after the filing of the return and the payment of the tax for the year or years in which any of the gain on an involuntary conversion is realized and before the expiration of the period within which the converted property must be replaced, a claim for credit or refund for such year or years should be filed. If the replacement of the converted property occurs in a year or years in which none of the gain on the conversion is realized, all of the details in connection with such replacement shall be reported in the return for such year or years. (3) The period referred to in subparagraphs (1) and (2) of this paragraph is the period of time commencing with the date of the disposition of the converted property, or the date of the beginning of the threat or imminence of requisition or condemnation of the converted property, whichever is earlier, and ending 2 years (or, in the case of a disposition occurring before Dec. 31, 1969, 1 year) after the close of the first taxable year in which any part of the gain upon the conversion is realized, or at the close of such later date as may be designated pursuant to an application of the taxpayer. Such application shall be made prior to the expiration of 2 years (or, in the case of a disposition occurring before Dec. 31, 1969, 1 year) after the close of the first taxable year in which any part of the gain from the conversion is realized, unless the taxpayer can show to the satisfaction of the district director (i) Reasonable cause for not having filed the application within the required period of time, and (ii) The filing of such application was made within a reasonable time after the expiration of the required period of time. The application shall contain all of the details in connection with the involuntary conversion. Such application shall be made to the district director for the internal revenue district in which the return is filed for the first taxable year in which any of the gain from the involuntary conversion is realized. No extension of time shall be granted pursuant to such application unless the taxpayer can show reasonable cause for not being able to replace the converted property within the required period of time. (4) Property or stock purchased before the disposition of the converted property shall be considered to have been purchased for the purpose of replacing the converted property only if such property or stock is held by the taxpayer on the date of the disposition of the converted property. Property or stock shall be considered to have been purchased only if, but for the provisions of section 1033 (c), the unadjusted basis of such property or stock would be its cost to the taxpayer within the meaning of section 1012. If the taxpayer's unadjusted basis of the replacement property would be determined, in the absence of section 1033 (c), under any of the exceptions referred to in section 1012, the unadjusted basis of the property would not be its cost within the meaning of section 1012. For example, if property similar or related in service or use to the converted property is acquired by gift and its basis is determined under section 1015, such property will not qualify as a replacement for the converted property. (5) If a taxpayer makes an election under section 1033 (a) (3), any deficiency, for any taxable year in which any part of the gain upon the conversion is realized, which is attributable to such gain may be assessed at any time before the expiration of three years from the date the district director with whom the return for such year has been filed is notified by the taxpayer of the replacement of the converted property or of an intention not to replace, or of a failure to replace, within the required period, notwithstanding the provisions of section 6212 (c) or the provisions of any other law or rule of law which would otherwise prevent such assessment. If replacement has been made, such notification shall contain all of the details in connection with such replacement. Such notification should be made in the return for the taxable year or years in which the replacement occurs, or the intention not to replace is formed, or the period for replacement expires, if this return is filed with such district director. If this 432 Title 26 Chapter 1 business or for investment and occurring after December 31, 1957, see § 1.1033(g)— 1. See also special rules applicable to involuntary conversions of property sold pursuant to reclamation laws, livestock destroyed by disease, and livestock sold on account of drought provided in §§ 1.1033 (d)-1, 1.1033 (e)-1, and 1.1033 (f)-1, respectively. For rules relating to basis of property acquired through involuntary conversions, see § 1.1033(c) – 1. For determination of the period for which the taxpayer has held property acquired as a result of certain involuntary conversions, see section 1223 and regulations issued thereunder. For treatment of gains from involuntary conversions as capital gains in certain cases, see section 1231(a) and regulations issued thereunder. For portion of war loss recoveries treated as gain on involuntary conversion, see section 1332(b) (3) and regulations issued thereunder. [T.D. 6500, 25 F.R. 11910, Nov. 26, 1960, as amended by T.D. 6856, 30 F.R. 13318, Oct. 20, 1965] § 1.1033(a)-2 Involuntary conversion where disposition of the converted property occurred after December 31, 1950. (a) In general. This section applies only with respect to involuntary conversions where the disposition of the converted property occurred after December 31, 1950, and where the proceeds are received in a taxable year to which the Internal Revenue Code of 1954 applies. The term "disposition of the converted property" means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemna tion. (b) Conversion into similar property. 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 only into property similar or related in service or use to the property so converted, no gain shall be recognized. Such nonrecognition of gain is mandatory. (c) Conversion into money or into dissimilar property. (1) If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or $ 1.1033(a)-2 other property property so converted, or the cost of stock of a corporation owning such which is purchased by the taxpayer in the acquisition of control of such corporation, if the taxpayer purchased such other property, or such stock, for the purpose of replacing the property so converted and during the period specified in subparagraph (3) of this paragraph. For the purposes of section 1033, the term "control" means the ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number shares of all other classes of stock of the corporation. of (2) All of the details in connection with an involuntary conversion of property at a gain (including those relating to the replacement of the converted property, or a decision not to replace, or the expiration of the period for replacement) shall be reported in the return for the taxable year or years in which any of such gain is realized. An election to have such gain recognized only to the extent provided in subparagraph (1) of this paragraph shall be made by including such gain in gross income for such year or years only to such extent. If, at the time of filing such a return, the period within which the converted property must be replaced has expired, or if such an election is not desired, the gain should be included in gross income for such year or years in the regular A failure to so include such gain in gross income in the regular manner shall be deemed to be an election by the taxpayer to have such gain recognized only to the extent provided in subparagraph (1) of this paragraph even though the details in connection with the conversion are not reported in such return. If, after having made an election under section 1033 (a) (3), the converted property is not replaced within the re manner. 431 |