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Commissioner, T.C. Memo. 1977-13 (citing Rev. Rul. 67-254, supra,
with approval and allowing section 1033 treatment of conversion
compensation funds used to construct a property similar to the
converted property).
Respondent has attempted to attack petitioners’ use of the
funds received from Allstate by arguing that petitioners made
improvements rather than replacements. Respondent first pointed
out that petitioners replaced their Formica countertops with
Corian, a more expensive material. However, petitioners
explained that they were able to buy the Corian at cost so that
it was less expensive than Formica. Respondent then alleged that
petitioners had unnecessarily replaced trees on their property
with the settlement proceeds. Petitioners countered, showing
that the trees had to be moved due to the placement of the new
retaining wall. Respondent then attempted to show that
petitioners used the proceeds to replace clear glass with
colored, but petitioners paid the $300 to color the glass out of
their own pockets. Finally, respondent argued that petitioners
had introduced air conditioning to the house though it had not
previously been air conditioned. There is no cost breakdown of
the $4,156.75 paid to replace the entire heating system and to
add air conditioning. However, even if we were to assume that
half of that amount was attributed to adding air conditioning, it
would be less than 1 percent of the total estimated repair cost.
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