Rev. Rul. 63-127

Advice has been requested whether the nonrecognition-of-gain benefits of section 1033(a)(3) of the Internal Revenue Code of 1954 are available to a taxpayer under the circumstances described below.

In 1960, the taxpayer sold a parcel of land under threat of condemnation, receiving the entire proceeds of the sale in that year with a resulting gain. In the same year, he reinvested a portion of the sales proceeds in replacement property. On his 1960 Federal income tax return, the taxpayer reported the gain and paid the tax on it to the extent the sales proceeds exceeded the cost of the replacement property in which he had reinvested.

In 1961, the taxpayer decided to make an election under section 1033(a)(3)(A) of the Code with respect to the unexpended portion of the conversion proceeds and accordingly reinvested this amount in replacement property. Accompanying his 1961 return, filed on April 14, 1962, was a complete schedule of the replacement property purchases made in both 1960 and 1961. At the same time, he filed a claim for refund for the year 1960 based upon an overpayment of tax due to the amount of the gain from the involuntary conversion which was returned as income in 1960.

Section 1033(a)(3) of the Code provides, in part, for nonrecognition of gain from involuntary conversions which occur after December 31, 1950, to the extent and in the manner provided in that section, where the amount realized is used to purchase property similar or related in service or use to the property so converted.

Section 1033(a)(3)(B) of the Code provides, in part, that the converted property must be replaced not later than one year after the close of the first taxable year in which any part of the gain upon the conversion is realized, unless an extension of the replacement period is granted.

Section 1.1033(a)-2(c)(2) of the Income Tax Regulations provides, in part, that all of the details in connection with an involuntary conversion of property at a gain shall be reported in the return for the taxable year or years in which any of such gain is realized. An election to have the gain recognized only to the extent that the amount realized upon the conversion exceeds the cost of proper replacement property purchased during the replacement period shall be made by including such gain in gross income for such year or years only to such extent. If a decision is made to make an election under section 1033(a)(3) of the Code after the filing of the return and the payment of the tax for the year or years in which any of the gain on an involuntary conversion is realized and before the expiration of the period within which the converted property must be replaced, a claim for credit or refund for such year or years should be filed. If the replacement of the converted property occurs in a year or years in which none of the gain on the conversion is realized, all of the details in connection with such replacement shall be reported in the return for such year or years.

In order to make an effective election that previously reported gain from an involuntary conversion, shall not be recognized, it is apparent from the foregoing provisions that the taxpayer must actually make the decision to elect and the reinvestment in replacement property within the period specified in section 1033(a)(3) of the Code. Section 1.1033(a)-2(c)(2) of the regulations provides in effect, that a taxpayer who has made such an election may adjust his tax liability by filing a claim for credit or refund. The claim may be filed within the regular period of limitations, as determined under section 6511 of the Code, and does not have to be filed prior to the expiration of the replacement period.

The taxpayer in this case made the decision to make the election and reinvested the remainder of the conversion proceeds in replacement property within the period specified in section 1033(a)(3) of the Code. The taxpayer also filed his 1961 return and explained therein the details in connection with the replacement property. He filed therewith a claim for refund of tax paid in 1960.

On the basis of these facts, it is held that he made an effective election that gain on such amount shall not be recognized. It is further held that the claim was timely filed since the taxpayer could have filed the claim at any time prior to the expiration of the applicable period of limitations for filing such a claim for the year 1960, as determined under section 6511 of the Code.