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The Internal Revenue Code generally takes gains and losses
into account only when they are realized by a sale or exchange.
Sec. 1001(a), (c); sec. 1.1001-1(a), Income Tax Regs. When a
taxpayer receives money or other property as consideration for
the condemnation of his property, there has been an "exchange"
for income tax purposes. See sec. 1033(a); Kieselbach v.
Commissioner, 317 U.S. 399, 402 (1943); Tiefenbrunn v.
Commissioner, 74 T.C. 1566, 1570 (1980).
Gain from the exchange of property is the excess of the
amount realized from the exchange over the property's adjusted
basis, while loss is the excess of the adjusted basis over the
amount realized. Sec. 1001(a). The "amount realized" in an
exchange is the sum of any money received plus the fair market
value of any property (other than money) received. Sec. 1001(b).
Amounts received as interest are not part of the "amount
realized" from the exchange of property. Kieselbach v.
Commissioner, supra at 403; Tiefenbrunn v. Commissioner, supra at
1572. The "adjusted basis" of property exchanged is the
property's unadjusted basis (e.g., section 1012 cost basis)
adjusted as provided in section 1016 (e.g., reduced for
depreciation allowable). Sec. 1011(a).
Generally, gain or loss realized on an exchange of property
must be recognized. Sec. 1001(c). An important exception to
this general rule is provided by section 1033, which allows gain
realized from certain involuntary conversions to be deferred.
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