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application for extension must be filed prior to the expiration
of 3 years after the close of the first taxable year in which any
part of the gain from the conversion is realized. Sec.
1.1033(a)-2(c)(3), Income Tax Regs.
Petitioners have stipulated that they did not ask the IRS
for an extension of time in which to buy replacement property
pursuant to section 1033. Accordingly, we must determine whether
petitioners purchased replacement property within 3 years after
the close of the first taxable year in which any part of the gain
upon the conversion was realized. Sec. 1033(a)(2)(B)(i). The
key to resolving this issue is the date on which gain was
realized, if at all, on the conversion of the petitioners'
property.
On June 5, 1980, the State deposited $28,400 with the
circuit court as compensation to petitioners for condemnation of
their property. The condemnation actually occurred on June 16,
1980, and, on June 24, 1980, petitioners withdrew the $28,400
deposit. Despite withdrawing these funds in 1980, petitioners
argue that no amount was realized until 1989, when the amount of
compensation that they were entitled to receive as a result of
the condemnation was finally determined. We have previously
addressed this argument in the context of condemnation deposits,
and it is well settled that, under the claim of right doctrine,
such amounts are realized to the taxpayer in the year received
even though at the time of receipt conditions exist which might
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