Rev. Rul. 58-11

Advice has been requested whether the transaction described below constitutes an involuntary conversion of property within the meaning of section 1033 of the Internal Revenue Code of 1954.

M Corporation was ordered by a United States district court to dispose of its stock interest in N Corporation on the ground that M Corporation's ownership of such stock violated section 1 of the Sherman Anti-Trust Act, 26 Stat. 209, 15 U.S.C. 1-7. M Corporation sold its stock in N Corporation and immediately reinvested the proceeds from the sale in the stock of two of N Corporation's subsidiaries. It is the position of M Corporation that the forced sale of its stock in N Corporation was an involuntary conversion of such stock as a result of its condemnation within the meaning of section 1033; and since the proceeds from the sale were immediately reinvested in property related in use to that involuntarily converted, M Corporation contends that gain realized by it upon the sale comes within the nonrecognition provisions of section 1033.

Section 1033 provides for the nonrecognition of gain, under prescribed conditions, resulting from certain involuntary conversions of property into money or other property. For purposes of section 1033, an involuntary conversion is a transaction in which property has been compulsorily or involuntarily converted as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof. All involuntary conversions, then, are not covered by this section. Only those involuntary conversions which result from one of the specified causes are entitled to treatment under section 1033. See Rev. Rul. 57-314, C.B. 1957-2, 523, and cases cited therein.

Since M Corporation's stock interest in N Corporation was not destroyed, stolen, seized, requisitioned, or disposed of as the result of a threat or imminence of requisition, the involuntary conversion of such stock must have resulted from the stock's condemnation or threat or imminence thereof in order to bring the conversion within the scope of section 1033. The Service has taken the position that, as used in section 1033, the term `condemnation' refers to the process by which private property is taken for public use without the consent of the property owner but upon the award and payment of just compensation. See Rev. Rul. 57-314, supra . A federal court's order to a corporation to divest itself of ownership of certain stock because such ownership is in violation of the Sherman Anti-Trust Act is not taking of the stock for public use. For this reason, a sale of the stock pursuant to such an order does not result from the stock's condemnation or from a threat or imminence of its condemnation within section 1033. In this connection, see Rev. Rul. 55-717, C.B. 1955-2, 298. Further, if the proceeds from the sale are reinvested in similar shares of stock in another company, there has not been a nontaxable exchange within the provisions of section 1033 or within any provision of the income tax statute.