Rev. Rul. 56-372

Advice has been requested whether the receipt of fire insurance proceeds from the destruction of a building constitutes a "sale" for the purpose of determining gain or loss within the meaning of section 337(a) of the Internal Revenue Code of 1954.

In the instant case, Z corporation is on a fiscal year ending June 30 and reports income on the accrual method of accounting. The stockholders had considered the advisability of dissolving the corporation and operating the business as a partnership. In July 1955, the company adopted a plan of complete liquidation at which time it intended to sell all of its property and liquidate within a twelve month period from the date of the adoption of such plan of liquidation. Under such a plan and pursuant to section 337(a) of the 1954 Code, no gain or loss would be recognized to the corporation from the sale or exchange by it of property within such twelve month period. In August 1955, one of the buildings covered by insurance was completely destroyed by fire.

Section 337(a) of the Internal Revenue Code of 1954 provides in part as follows:

(a) GENERAL RULE--IF--

(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and

(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,

then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12 month period.

Where a taxpayer sustains a loss of his property due to fire, there is no question that an involuntary conversion of his property has occurred. However, the fact that section 1033 of the 1954 Code characterizes destruction of property and indemnification for its loss as an involuntary conversion does not establish that the two events constitute a sale or exchange, neither are the provisions of section 1231(a), relating to the determination of capital gains and losses in the case of property used in the trade or business and involuntary conversions, effective to characterize these events as a sale or exchange under section 337.

Generally speaking, the language in the Revenue Act just as in any statute is to be given its ordinary meaning and the words "sale" and "exchange" are not to be read differently; neither term is appropriate to characterize the demolition of property and subsequent compensation for its loss by an insurance company. See Helvering v. Godfrey Hammel et al., 311 U. S. 504, Ct. D. 1480, C. B. 1941-1, 375; and Douglas Fairbanks v. U. S., 306 U. S. 436, Ct. D. 1391, C. B. 1939-1, 260.

Thus, in Helvering v. William Flaccus Oak Leather Co., 313 U. S. 247, Ct. D. 1510, C. B. 1941-1, 324, it was held that an amount received from an insurance company as compensation for the loss of property destroyed by fire was not derived from the "sale" or "exchange" of a capital asset. In its opinion, the court commented that nothing in the language of the Revenue Act, either expressly or by implication, indicated that Congress intended to classify as "sales" or "exchanges" the involuntary conversions enumerated in section 112(f) of the Internal Revenue Code of 1939, the counterpart of section 1033 of the Internal Revenue Code of 1954.

Accordingly, it is held that the receipt of fire insurance proceeds from the complete destruction of a building by fire, resulting in an involuntary conversion, does not constitute a "sale" for the purpose of obtaining nonrecognition of gain or loss benefits where liquidation of corporate assets is made pursuant to section 337(a) of the Internal Revenue Code of 1954.