Rev. Rul. 56-420

Advice has been requested whether a taxpayer, who sells a portion of the lot on which his residence is located to pay an assessment for paving two streets adjoining his property may, avoid the recognition of gain by reinvesting in other property.

The taxpayer was assessed by the city in which his home was located an amount for paving certain streets bordering his property. For payment in cash, the assessment could be reduced by $700. To raise the money to pay the assessment, he sold a portion of the lot on which he had his garden, orchard, and chicken yard.

Section 1034(a) of the Internal Revenue Code of 1954 relating to the sale of a residence provides, in part, as follows:

(a) NONRECOGNITION OF GAIN.-If property (in this section called `old residence') used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year after such date, property (in this section called `new residence') is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's adjusted sales price (as defined in subsection (b)) of the old residence exceeds the taxpayer's cost of purchasing the new residence.

The phrase `property used by the taxpayer as his principal residence' has not been specifically defined for the purpose of section 1034(a) of the 1954 Code (section 112(n) of the Internal Revenue Code of 1939). In the Supplemental Senate Report No. 781, Part 2, Eighty-second Congress, 1st Session, C.B. 1951-2, 545 at 566, with respect to section 318 of the Revenue Act of 1951 relating to the definition in question, however, it is stated as follows:

Whether or not property is used by the taxpayer as his residence, and whether or not property is used by the taxpayer as his principal residence (in the case of a taxpayer using more than one place of residence), depends upon all of the facts and circumstances in each individual case, including the bona fides of the taxpayer. * * *

The taxpayer's garden, orchard, and chicken yard, which provided products for his own use, constituted a part of the property which he used as his principal residence. Inasmuch as the property disposed of did not include the taxpayer's dwelling, the benefits of section 1034(a) of the 1954 Code are inapplicable since the term `property used by the taxpayer as his principal residence' relates to property on which is located the dwelling in which the taxpayer actually resides.

Section 39.112(f)-1(c)(1) of Regulations 118, relating to involuntary conversions, made applicable to section 1033 of the 1954 Code pursuant to Treasury Decision 6091, C.B. 1954-2, 47, contains the following provision:

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 or into property not similar or related in service or use to the converted property, the gain, if any, shall be recognized, at the election of the taxpayer, only to the extent that the amount realized upon such conversion exceeds the cost of other property purchased by the taxpayer which is similar or related in service or use to the property so converted * * * if the taxpayer purchased such other property * * * for the purpose of replacing the property so converted and during the period specified. * * *

The taxpayer's property in the instant case was not destroyed in whole or in part, nor was it stolen, seized, requisitioned or condemned. The nature of the danger to his property was that, if he had not paid the assessment, legal action might eventually have been taken against him which could have resulted in the eventual loss of his property. This is no more than might happen in the case of any unpaid account and cannot be construed to constitute a threat or imminence of seizure, requisition, or condemnation.

Accordingly, it is held that the sale of only a portion of the city lot, on which the taxpayer's residence is located, to pay an assessment for paving the streets adjoining such property does not constitute the sale of a principal residence or an involuntary conversion within the meaning of sections 1034 and 1033, respectively, of the Code. The amount of the gain realized is taxable as gain from the sale of a capital asset in the year the sale is consummated.