Revenue Ruling 64-237
Internal Revenue Service
1964-2 C.B. 319 (1964)
Section 1033 of the Internal Revenue Code provides for nonrecognition of gain on the involuntary conversion of a taxpayer’s property into replacement property that is similar or related in service or use. Before 1964, the Internal Revenue Service (IRS) had taken the position in litigation that the phrase “similar or related in service or use” meant that the replacement property had to be functionally similar to the converted property. In other words, the physical characteristics and the end uses of the converted property and the replacement property had to be closely similar. However, federal appellate courts rejected the IRS’s functional-use test in situations in which property was held by investors, including lessors. For example, in Liant Record, Inc. v. Commissioner, the United States Court of Appeals for the Second Circuit had explained that if a taxpayer-owner owned property on which the taxpayer operated a grocery store and then operated a car dealership on replacement property after an involuntary conversion, the taxpayer would be outside § 1033’s nonrecognition provision because the taxpayer’s end uses of the property were different. The court further explained that if, instead, the taxpayer-owner was a lessor who rented the original property for a tenant’s use as a grocery store and rented the replacement property for a tenant’s use as a car dealership, the taxpayer-owner’s use of the property for rental income remained similar, even though the end use of the property itself had changed. Accordingly, the Second Circuit held that the appropriate test for determining whether property was “similar or related in service or use” involved comparing the services or uses of the original and replacement properties to the taxpayer-owner. In light of Liant Record and other federal appellate decisions, the IRS issued a revenue ruling regarding when replacement property is similar or related in service or use to involuntarily converted property for purposes of § 1033(a).
Rule of Law
Holding and Reasoning ()
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