"Threat" of involuntary conversion defined for sec. 1033 Purposes.

In Letter Ruling 9914030, the IRS concluded that a taxpayer's sale of property to a third party qualified as an involuntary conversion under Sec. 1033.

The taxpayer owned land adjacent to a government-owned facility. After learning that the government planned to expand the facility to that area, the taxpayer sought to sell the land to a third party, rather than sell the land involuntarily to the government. (The third party was offering a higher price for the land than the government was planning to "offer" under eminent domain proceedings.)

In support of its conclusion that the sale qualified as an involuntary conversion, the Service stated that the threat or imminence of Conversion or both by the government sufficed for Sec. 1033 purposes. Threat, for Sec. 1033 purposes, was defined in Rev. Rul. 63-221 and is deemed to exist when a "property owner is informed, either orally or in writing, by ... a governmental body ... that such body ... has decided to acquire his property and the property owner has reasonable grounds to believe, from the information conveyed ... that the necessary steps to condemn the property will be instituted if a voluntary sale is not arranged."

The IRS concluded that the government had advertised and held meetings about its intention to expand the facility, and had also sought appraisals for the land. Because these actions were consistent with those described in Rev. Rul. 63-221, an involuntary sale was deemed to have occurred; the taxpayer was permitted to defer the recognition of gain on the sale of his property to the third party.

FROM ROBERT PENTIMONTI, J.D., LL.M. ,WASHINGTON, DC