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related in service or use to the converted property. Sec.
1033(a)(2)(A). Under section 1033(a)(2)(A), gain will be
recognized only to the extent that the amount realized from the
conversion exceeds the cost of the replacement property. Among
other things, an involuntary conversion results when property is
condemned by the government. Sec. 1033(a).
In general, the replacement period under section 1033 begins
on the date of the disposition of the converted property, or if
earlier, on the date when requisition or condemnation is
threatened, and ends 2 years after the close of the first taxable
year during which any part of the gain from the conversion is
realized. Sec. 1033(a)(2)(B). The ending date of the
replacement period may be extended if the taxpayer timely files
an application with the Commissioner. Section 1033(a)(2)(B)(ii).
The principal issue in this case is whether section 1033
permits the use of multiple replacement periods in connection
with a single condemnation of property by the government. The
parties agree that any replacement period involved in this case
began in October 1985. Petitioners argue, however, that this
case requires the use of two replacement periods because
conversion proceeds were received on two different dates.
Specifically, petitioners maintain that the first replacement
period ended on December 31, 1988, and pertained to the portion
of the conversion proceeds that Mr. Shipes received on July 28,
1986. The second replacement period, according to petitioners,
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