Robert J. and Anne L. Wilson - Page 19

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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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