Rev. Rul. 67-254

Advice has been requested whether the nonrecognition-of-gain benefits under the provisions of section 1033 of the Internal Revenue Code of 1954 apply where the proceeds of a condemnation award are used to rearrange plant facilities on the remaining portion of the plant property. Additionally, the question is raised as to whether such benefits apply if the taxpayer uses part of the award to erect a building on land he presently owns.

A State condemned a portion of the land upon which the taxpayer's manufacturing plant was situated. The condemned portion had been used as a storage area for the taxpayer's product and also contained thereon a garage which housed the plant's delivery trucks. The taxpayer received an award for the condemned property, none of which was compensation for damages to the portion of the property which he retained.

Because of the prohibitive cost of acquiring land in the area suitable for storage, the taxpayer used part of the proceeds of the condemnation award in the year of its receipt to rearrange the layout of his plant facilities on the remainder of his land in order to create a new storage area. He used the remainder of the award to build a new garage (to house the plant's delivery trucks) on a small plot of land located nearby, which he had owned for several years.

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.

Accordingly, based on these facts, to the extent that the taxpayer expended the condemnation proceeds in restoring the plantsite so that it could be used in the same manner as it was used prior to the condemnation, he has acquired property similar or related in service or use to the property converted for purposes of section 1033(a)(3)(A) of the Code. Whether all of the expenditures made by the taxpayer were necessary to restore the plantsite to its original usefulness is a question of fact to be determined upon examination of his income tax return for the year in which the transaction occurred.

In addition, the garage erected on land already owned qualifies under section 1033(a)(3)(A) of the Code as property similar or related in service or use to the garage that was condemned.