Rev. Rul. 69-654

Advice has been requested whether, under the circumstances described below, property is involuntarily converted for purposes of the nonrecognition of gain provisions of section 1033 of the Internal Revenue Code of 1954.

The taxpayer, a real estate developer, acquired unimproved land for the purpose of subdividing it into residential lots for the construction and sale of homes. At the time the taxpayer acquired the land he knew that before the planning and zoning authorities would approve development, the school district investigates the property to determine if sites for future schools are needed. If it is determined by the school district that future schools should be provided for, a site will be selected. If the developer decides he does not want to give up the site, he can withdraw his application for zoning approval and not develop the land for the construction and sale of homes.

In the instant case, the school district decided that a school would be needed and selected a site which was set aside and designated on the subdivision map. The taxpayer accepted the decision that the land would be taken, as a condition to developing the remaining property. This property will remain vacant until needed for construction of a school at which time the school district will acquire it from the taxpayer by condemnation proceeding if the parties cannot agree upon the issue of just compensation. Thus, the condemnation proceedings would merely determine the value of the property and not the right of the school district to take the property.

Section 1033(a) of the Code provides for the nonrecognition of gain upon the involuntary conversion of property as a result of condemnation, or a sale under threat or imminence thereof, if the taxpayer so elects and the conditions of section 1033 of the Code are otherwise met.

The term "condemnation," as used in section 1033 of the Code, 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 Revenue Ruling 57-314, C.B. 1957-2, 523. A conversion of property is not involuntary within the meaning of section 1033 of the Code where, as in the instant case, the property owner voluntarily consents to the subsequent conversion of part of his property as a condition to receiving zoning approval for the development of his remaining property.

Accordingly, the taxpayer in this case will not be entitled to the benefits of section 1033 of the Code upon the acquisition of his land by the school district for the building of a school.