Revenue Ruling 89-2

1989-1 C.B. 259 (1989)

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Revenue Ruling 89-2

Internal Revenue Service
1989-1 C.B. 259 (1989)

  • Written by Abby Roughton, JD

Facts

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.

Rule of Law

Issue

Holding and Reasoning (1)

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Casebooks

Federal Income Tax

Key Terms

  • TakingUnder constitutional law, the government’s actual or effective appropriation of a person’s private property, including by substantially interfering with such person’s use and possession of the property. Under environmental law, taking refers to the act of killing, capturing, or otherwise subjecting a wild animal to human control.
  • Eminent DomainThe government’s inherent authority to take private property for public use. The government must provide just compensation to the property owner.
  • CondemnationThe conversion of private land to public use by a government, exercising its power of eminent domain, in return for compensation to the condemned property's owner.
  • NonrecognitionA provision whereby gains or losses from certain transactions are not taken into account for tax purposes.
  • Involuntary ConversionA change in the use or nature of an owner’s assets that is caused by circumstances beyond the owner’s control.
  • Revenue RulingA ruling issued by the national office of the Internal Revenue Service as an official interpretation of the tax law as applied to a specific transaction.

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