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Rev. Rul. 72-372, 1972-2 CB 471

REV-RUL, Involuntary conversion where disposition of the converted property occurred after December 31, 1950., Rev. Rul. 72-372, 1972-2 CB 471, (Jan. 01, 1972)

Section 1033.--Involuntary Conversions

26 CFR 1.1033(a)-2: Involuntary conversion where disposition of the converted property occurred after December 31, 1950.
Gain from the voluntary sale of timber uprooted by a hurricane does not qualify for the nonrecognition of gain provisions of section 1033(a) of the Code even though the proceeds are used to purchase other standing timber.

Advice has been requested whether, under the circumstances described below, a taxpayer is entitled to the non-recognition of gain provisions of section 1033(a) of the Internal Revenue Code of 1954 with respect to the proceeds received from a sale of timber.

The taxpayer is the owner of timberland. As a result of a hurricane, a considerable number of trees were uprooted. The timber was not insured and, once downed, was subject to decay or would be rendered totally worthless by insects within a relatively short period of time. The taxpayer was, however, able to sell the damaged timber and realized a gain from such sale. The proceeds of the sale was used to purchase other standing timber.

Section 1033(a)(1) of the Code provides rules, in part, under which no gain is to be recognized where property is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted. It is indicated in this Code section and in section 1.1033(a)-1(a) of the Income Tax Regulations thereunder that an involuntary conversion may be, among other things, as a result of the destruction of property in whole or in part.

Section 1.1033(a)-2(a) of the regulations relates 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 in which the Internal Revenue Code of 1954 applies. Therein, the term "disposition of converted property" is stated to mean 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. Thus, if a sale takes place the transaction can qualify as an involuntary conversion only if such sale is under threat or imminence of requisition or condemnation. In limited circumstances, however, sections 1033(d), (e), and (f) of the Code, which do not relate to the facts of this case, do provide that an involuntary conversion by destruction may occur despite a sale by the taxpayer.

Section 1.1033(a)-2(c) of the regulations provides, in part, that if property as a result of its destruction in whole or part 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 the other property purchased by the taxpayer which is similar or related in service or use to the property so converted.

Revenue Ruling 54-395, C.B. 1954-2, 143 and Revenue Ruling 66-334, C.B. 1966-2, 302 considered situations wherein a destruction resulted in a gain. In each of those Revenue Rulings it was held that an involuntary conversion had taken place which entitled the taxpayer to defer the recognition of gain. However, as distinguished from the present situation, in each of those Revenue Rulings the destruction resulted in the direct conversion of the property into money in the form of damages. Similarly, in Revenue Ruling 59-8, C.B. 1959-2, 202 it was held that the destruction of a standing crop of wheat constituted an involuntary conversion within section 1033 of the Code. In that Revenue Ruling, there was also a direct conversion into money in the form of insurance proceeds.

In the present situation there is no direct conversion into money as contemplated by section 1033(a)(3) of the Code. The sale of the timber was not under threat or imminence of condemnation or requisition, and the provisions of section 1033(d), (e) and (f), of the Code are not applicable. Therefore, the timber was not involuntarily converted into money as prescribed by section 1.1033(a)-2(c) of the regulations, but was voluntarily sold by the taxpayer subsequent to its damage by the hurricane.

Accordingly, based on the stated facts, the non-recognition of gain provisions of section 1033(a) of the Code are not available to the taxpayer. Thus, the gain from the sale of the timber must be included in gross income in the year the gain is realized.