Rev. Rul. 55-717

Advice has been requested whether the transaction described below constitutes a transaction under a threat of condemnation for Federal income tax purposes, resulting under the given circumstances in a nontaxable exchange.

A state statute provides that any stock life insurance company of that state may adopt a plan of mutualization and to that end may acquire all of its outstanding capital stock. The statute further provides that, after the plan has been in effect for more than 5 years and the company has acquired at least 90 percent of its outstanding stock, if the company is unable to obtain the remaining shares, the courts of that state have jurisdiction to compel the sale of the outstanding stock to the company at a price determined by the court. After such a sale, the stock is retired and cancelled and the former holders possess no further rights with respect thereto.

In the instant case, an insurance company has, within the terms of the statute, acquired more than 90 percent of its outstanding stock but has been unable to purchase the remaining shares. The taxpayer owns a portion of the remaining outstanding stock. Pursuant to the prescribed court order, the taxpayer sells his shares to the company and reinvests the proceeds in similar stock of another life insurance company.

Section 1033 of the Internal Revenue Code of 1954 provides in part that if property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted into money, and the taxpayer within the period prescribed purchases other property similar or related in service or use to the property involuntarily converted or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion exceeds the cost of such other property or such stock.

In order to receive the benefits of section 1033 of the Code, it is necessary that a taxpayer show that the property in question was converted in one of the ways described in such section. Here the sale of stock to the insurance company, in accordance with the state law or as a result of court action in connection with the carrying out of such law, does not constitute a transaction consummated under a threat of condemnation or under condemnation proceedings within the meaning of section 1033 of the Code.

Accordingly, it is held that the sale of shares of stock made necessary by a state legislative act is not a transaction consummated under a threat of condemnation within the meaning of section 1033 of the Internal Revenue Code of 1954. 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 such section or within any provision of the income tax statute