Phillip Lee and Carolyn F. Allen - Page 6




                                        - 6 -                                         

               Petitioners attribute their success to their evidence that             
          the settlement funds were spent on repairs.  This evidence,                 
          however, does not address the threshold element of the two                  
          section 1033 prerequisites to nonrecognition treatment.  To                 
          qualify under section 1033, the payment must have been received             
          as compensation for an involuntary conversion of the taxpayer’s             
          property.  See sec. 1033(a).  Having established that, then it              
          must be shown that the money was expended within a specified                
          period of time for the replacement of the converted property with           
          similar property.  See sec. 1033(a)(2)(A) and (B).  Only after              
          the threshold question, whether the amount received was                     
          compensatory, has been answered is it necessary to consider the             
          issue of how the funds were spent.  Although an explanation of              
          both prongs of section 1033 was given in our opinion, petitioners           
          have persisted in their single-minded focus on the repair and               
          replacement aspect.                                                         
               If the character is not clear on the face of a settlement,             
          the characterization of settlement proceeds becomes a factual               
          inquiry, dependent on the payor’s intent when the proceeds were             
          paid.  See Hentzel v. Commissioner, T.C. Memo. 1991-277.  “[W]hen           
          respondent receives conflicting evidence of the payor’s intent,             
          * * * respondent does not act unreasonably by insisting upon an             
          explanation to clear up the conflict.”  Id.   Where unexplained             
          facts support respondent’s position and the Court must consider             





Page:  Previous  1  2  3  4  5  6  7  8  9  Next

Last modified: May 25, 2011