William T. Shipes, Jr. and Kathy D. Shipes - Page 4

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          OCCC award) on February 18, 1991, as additional compensation for            
          the destruction of his nursery stock.  Of this amount, $81,100.28           
          was interest and $10,757.73 was reimbursement of legal fees paid.           
          Petitioners included the portion of the OCCC award that                     
          constituted interest and reimbursement of legal fees on their               
          1991 Federal income tax return, but they did not report the                 
          remaining $105,654.07 (the additional conversion proceeds).                 
          Instead, petitioners attached a statement to their 1991 return              
          which purports to make an election under section 1033 to defer              
          recognition of the gain realized on the receipt of the additional           
          conversion proceeds.                                                        
               On January 28, 1993, petitioners purchased real estate for             
          $110,000 from Mr. Shipes' mother.                                           
               Respondent determined that the additional conversion                   
          proceeds do not qualify for nonrecognition under section 1033.  A           
          notice of deficiency was issued on June 23, 1995.                           
               As a general rule, gain realized from the sale or other                
          disposition of property must be recognized.  Sec. 1001(c).                  
          Section 1033 provides an exception to this general rule and                 
          allows for nonrecognition of gain realized from certain                     
          involuntary conversions of property if an appropriate election is           
          made and, during a specified replacement period and for purposes            
          of replacing the converted property, a taxpayer desiring to defer           
          recognition of such gain purchases other property similar or                

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