Rev. Rul. 59-108

Advice has been requested as to whether the condemnation of real estate of a corporation and the vesting of title to the property in the condemning authority pursuant to a court order issued within the 12-month period beginning on the date of the adoption of a plan of complete liquidation by the corporation, constituted a sale of the property as of the date of the court order within the meaning of section 337(a) of the Internal Revenue Code of 1954, although the payment of the condemnation award did not occur until after the close of the 12-month period.

A certain corporation owned beach front property. In 1953, the City of New York on the basis of an engineering survey, determined to acquire the corporation's property through a condemnation proceeding and to create a new public beach. Realizing that the condemnation could not be prevented and that the City of New York would take over substantially all of the corporation's property, the stockholders of such corporation at a stockholders' meeting held on December 4, 1954, adopted a plan of complete liquidation of the corporation.

On December 6, 1954, the appropriate local department of the Supreme Court of the State of New York in the condemnation proceeding brought by the City of New York issued an order granting the application of the city to condemn most of the corporation's real estate. In that connection, the law applicable to condemnations by the City of New York provides, subject to exceptions not here applicable, that when the application of the city to condemn is granted by such a decree, title to the real estate immediately passes, together with all the rights of ownership, possession, beneficial enjoyment, rights to collect the rents, as well as the obligations to pay taxes which thereafter may become a lien upon the premises. The date of vesting is also the date as of which the fair market value of the property is subsequently fixed by the court as the basis of the just compensation which the city is thereupon obligated to pay.

On or before December 3, 1955, the corporation transferred all of its cash, real property, claims, and other assets subject to its liabilities, to its stockholders in complete redemption of its outstanding stock. The assets distributed included the claim for the condemnation award which had not been agreed upon or paid as of December 3, 1955.

It has been well established by various courts that condemnation proceedings should be treated as sales for purposes of Federal tax law. See Hawaiian Gas Products, Ltd. v. Commissioner , 126 Fed.(2d) 4, cert. den. 817 U.S. 653. Cf. Helvering v. Hammel, et al. , 311 U.S. 504, Ct. D. 1480, C.B. 1949-1, 375; G.C.M. 23646, C.B. 1943, 372. As to the distinction between condemnation and destruction by fire, see Rev. Rul. 56-372, C.B. 1956-1, 187. Section 1.337-2(a) of the income tax regulations provides, in part:

`In ascertaining whether a sale or exchange occurs on or after the date on which the plan of complete liquidation is adopted, the fact that negotiations for sale may have been commenced, either by the corporation or its shareholders or both shall be disregarded. Moreover, an executory contract to sell is to be distinguished from a contract of sale. Ordinarily, a sale has not occurred when a contract to sell has been entered into but title and possession of the property have not been transferred and the obligation of the seller to sell or the buyer to buy is conditional.'

The condemnation sale differs from an ordinary sale of property in that title may vest and possession be transferred before a determination of price has been made. Since the determination of price is normally a part of the negotiation in an ordinary sale, it might be contended that the first sentence of the quoted regulations applies and that until negotiations are concluded no sale occurs. However, because of the difference in nature of a condemnation proceeding, it is the view of the Revenue Service that once title and possession have passed to the condemning authority, `negotiations' have been concluded for purposes of section 1.337-2(a) of the regulations.

Determining when a sale occurs in the condemnation of real property is complicated by the fact that condemnation statutes vary as to the procedure for the vesting of title in the condemning authority and the fixing of an unconditional obligation on its part to pay just compensation for the taking. Such is the case not only as between one state and another but usually even as regards different condemnation statutes within the state. The State of New York is a good example in that its general condemnation law follows the more traditional procedure under which title vests and the obligation to pay just compensation is fixed only at the end of the proceeding. Under the law of the City of New York, on the other hand, title vests upon the entry of the court order granting the City's application to condemn, which is generally before any determination of the just compensation to be paid, unless the Board of Estimate by a three-fourths vote has directed that title shall be vested upon a specified date after the date of the court order.

It is accordingly necessary in each instance to examine the particular statute under which the condemnation has taken place in relation to such court orders as may be involved in order to determine whether the vesting of title and the fixing of the obligation to pay just compensation (whenever determined as to amount) has occurred at the beginning or at the end or at some intermediate point of the proceeding. It is the general rule that private property may constitutionally be taken for public use prior to the determination and payment of just compensation therefor only where there arises upon the taking an enforceable obligation to pay just compensation, when allowed under a procedure for its reasonably prompt ascertainment and payment. See Yearsley et al. v. Ross Construction Co. , 309 U.S. 18; Joslin Manufacturing Company v. City of Providence , 262 U.S. 677; Crosier v. Fried, Krupp Optiengesellschaft , 224 U.S. 290. The obligation of the condemning authority should therefore be treated as fixed upon any such taking which transfers the title to the property and creates an immediate obligation upon the condemning authority to pay just compensation, even though the amount of the compensation remains to be determined and paid at a later date.

In view of the facts presented, in accordance with the principles set forth above, the Revenue Service holds as follows:

(A) The date of adoption of the plan of liquidation of the corporation, for the purpose of determining the 12-month period referred to in section 337(a) of the Internal Revenue Code of 1954, is December 4, 1954, the date of the stockholders' meeting at which the stockholders adopted the plan of liquidation.

(B) The condemnation and vesting in the City of New York of title to certain of the corporation's property on December 6, 1954, constituted a sale of such property on that date within the meaning of section 337(a) of the 1954 Code.

(C) Pursuant to the provisions of section 337(a) of the Code, no gain or loss is recognized to the corporation as a result of the condemnation of its property and the simultaneous arising of the right of the corporation to receive fair and just compensation, as of December 6, 1954, for the property condemned, followed by the complete liquidation of the corporation on or before December 3, 1955.