Revenue Ruling 89-2

A taxpayer owned real estate that the taxpayer used in the taxpayer’s trade or business. Dangerous chemicals were released in the city where the taxpayer’s property was located. The chemical release was not the taxpayer’s fault. Officials conducted soil samples and found significant chemical contamination presenting serious health risks that could continue indefinitely. The officials announced that residents and businesses needed to relocate to protect public health and asked residents and businesses to sell their contaminated properties to the city. The compensation offered for the contaminated property was based on the property’s precontamination value. The city also passed an ordinance authorizing the use of eminent domain to acquire contaminated properties, if necessary. After the ordinance passed, the taxpayer sold the property to the city. The taxpayer realized a gain on the sale. Section § 1033(a) of the Internal Revenue Code provides for nonrecognition of gain if property is involuntarily converted into money due to the property’s whole or partial destruction or condemnation or the threat or imminence of condemnation. The Internal Revenue Service issued a revenue ruling regarding whether the contamination of the taxpayer’s property constituted destruction of the property and whether the sale of the property to the city constituted a sale under threat of condemnation for purposes of § 1033.