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Since petitioners realized a gain upon the conversion of
their property in 1980, which they did not include on their 1980
tax return, they constructively elected to have section 1033
apply to the gains arising from the condemnation. James River
Apartments, Inc. v. Commissioner, 54 T.C. 618, 631 (1970), affd.
per curiam 440 F.2d 412 (4th Cir. 1971); sec. 1.1033(a)-2(c)(2),
Income Tax Regs. However, to defer this gain under section 1033,
petitioners had to purchase replacement property within 3 years
after the close of their 1980 taxable year. Sec.
1033(a)(2)(B)(i). Petitioners did not comply with this
requirement, as they did not purchase the alleged qualified
replacement property until 1989 (Bath Co. property), well after
the close of the 3-year replacement period. Accordingly, we must
sustain respondent's determination that no part of the $61,604
paid by the State to petitioners in tax year 1989 is entitled to
nonrecognition under section 1033.
Issue 2. Interest Income
Although we have held that petitioners recognized gain from
the condemnation of their property and that this gain cannot be
deferred under section 1033, we still must address respondent's
argument that some portion of the $61,604 represents interest
income, with the remainder being gain for the exchange of the
condemned property. Petitioner argues that no portion of the
amount realized should be characterized as interest. As
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