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Petitioners attribute their success to their evidence that
the settlement funds were spent on repairs. This evidence,
however, does not address the threshold element of the two
section 1033 prerequisites to nonrecognition treatment. To
qualify under section 1033, the payment must have been received
as compensation for an involuntary conversion of the taxpayer’s
property. See sec. 1033(a). Having established that, then it
must be shown that the money was expended within a specified
period of time for the replacement of the converted property with
similar property. See sec. 1033(a)(2)(A) and (B). Only after
the threshold question, whether the amount received was
compensatory, has been answered is it necessary to consider the
issue of how the funds were spent. Although an explanation of
both prongs of section 1033 was given in our opinion, petitioners
have persisted in their single-minded focus on the repair and
replacement aspect.
If the character is not clear on the face of a settlement,
the characterization of settlement proceeds becomes a factual
inquiry, dependent on the payor’s intent when the proceeds were
paid. See Hentzel v. Commissioner, T.C. Memo. 1991-277. “[W]hen
respondent receives conflicting evidence of the payor’s intent,
* * * respondent does not act unreasonably by insisting upon an
explanation to clear up the conflict.” Id. Where unexplained
facts support respondent’s position and the Court must consider
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