Rev. Rul. 67-255

Advice has been requested whether the investment of condemnation proceeds, under the circumstances set forth below, will qualify as `like kind' replacement of involuntarily converted property for purposes of section 1033(g) of the Internal Revenue Code of 1954.

After 1957 land which the taxpayer held for investment was condemned. In the same year, the taxpayer expended the proceeds of the condemnation in the construction of an office building to be held for investment purposes on another site which he already owned.

The taxpayer also owned two separate tracts of unimproved rural land, one of which was condemned in a year after 1957. Immediately thereafter, the taxapyer invested the proceeds of the condemnation in the installation of storm drains, water systems, and roads on the remaining tract of rural land.

Section 1033(a)(3)(A) of the Code provides, in effect, that if property is compulsorily or involuntarily converted into money and the taxpayer, during the period specified, purchases other property similar or related in service or use to the property so converted, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion exceeds the cost of such other property.

Section 1033(g) of the Code provides, in part, that if real property (not including stock in trade or other property held primarily for sale) held for productive use in trade or business or for investment is (as the result of its seizure, requisition, or condemnation, or threat or imminence thereof) compulsorily or involuntarily converted after December 31, 1957, property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use to the property so converted.

Section 1.1033(g)-1 of the Income Tax Regulations provides, in part, that, for purposes of applying section 1033 of the Code to the disposition of real property held for productive use in trade or business or for investment, the principles of section 1.1031(a)-1 of the regulations are to be considered in determining whether the replacement property is of a like kind.

Section 1.1031(a)-1 of the regulations provides, in part, that the words `like kind' have reference to the nature or character of the property and not to its grade or quality. The section further states:

(b) * * * One kind or class of property may not, * * * be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. * * *

(c) No gain or loss is recognized if * * * (2) a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or exchanges a leasehold of a fee with 30 years or more to run for real estate, or exchanges improved real estate for unimproved real estate * * *.

The effect of section 1033(g) of the Code is to extend the nonrecognition-of-gains benefits of section 1033(a) of the Code to a taxpayer who acquires property of a like kind to real property converted, but not necessarily similar or related in service or use to it.

In considering the `like kind' test, although the term `real estate' is often used to embrace land and improvements thereon, land and improvements are by nature not alike merely because one term is used to describe both. Land is not of the same nature or character as a building, or a storm drain, or a water system, or a road.

Applying the foregoing to the facts in the instant case, the building constructed on land already owned does not qualify as replacement property under section 1033(g) of the Code as being of a like kind to the land involuntarily converted. Nor do the storm drains, water systems and roads constructed on land already owned qualify as replacement property under section 1033(g) as being of a like kind to the land involuntarily converted. However, see Revenue Ruling 67-254, page 269, this Bulletin, for a situation where improvements constructed on land already owned qualify as replacement property under section 1033(a)(3)(A) of the Code.

Accordingly, the investment of the proceeds from an involuntary conversion of land held for investment purposes, in the construction of an office building to be held for investment purposes upon land already owned by the taxpayer, does not qualify as a `like kind' replacement of the converted property within the meaning of section 1033(g) of the Code.

Also, the investment of the proceeds from an involuntary conversion of unimproved rural land in the installation of storm drains, water systems and roads on other unimproved rural land already owned by the taxpayer, does not qualify as a `like kind' replacement of the converted property within the meaning of section 1033(g) of the Code.

Revenue Ruling 55-749, C.B. 1955-2, 295; I.T. 4093, C.B. 1952-2, 130; and Commissioner v. Kate J. Crichton , 122 F.2d 181 (1941), affirming 42 B.T.A. 490 (1940), acquiescence, C.B. 1952-1, 2, are distinguishable because they do not involve land improvements. These rulings and the case hold that mineral interests and water rights are interests in real property and as such are of the same nature or character as fee interests in land.