When faced with a property condemnation, an owner is generally most
concerned about securing just compensation from the condemning authority
for the loss of the property. This is also true when the owner
negotiates the possible sale of property to the condemning authority
under the threat of eminent domain. The owner's attention is drawn
to developing theories and collecting information, with the help of
lawyers and appraisers, all to persuade the condemning authority of the
fair amount of compensation. The owner's goal is tangible: the
receipt of a check representing the condemnation proceeds.
One issue often not considered by a property owner is how the
proceeds from a judgment or settlement may be taxed. As peculiar as it
might seem, the government can first take your property and then tax the
gain realized from the receipt of just compensation. Thus, in addition
to preparing strategies for negotiations and litigation to obtain just
compensation, a property owner may be prudent to think about what
happens to the award or settlement after receiving payment. Depending on
the circumstances of the owner, hiring a good tax planner early in the
condemnation process may be as important as hiring a good litigator and
This article provides a general overview of how federal tax law
treats a gain realized from a condemnation proceeding or settlement
reached under threat of condemnation. We must emphasize that this
article only provides a general overview; analyzing the tax consequences
of condemnations can be complex, highly case sensitive, and involve
considerations beyond the scope of this article. Nevertheless, many
basic issues are discussed here, including how gains are taxed, how a
property owner can defer recognition of a condemnation gain, and the tax
treatment of special items such as interest, severance damages,
statutory relocation assistance, and temporary takings.
If one important point emerges from the din of IRS regulations,
revenue rulings, and tax court decisions, it is the importance of
effective drafting of settlements in condemnation proceedings and
prelitigation sales negotiated under the threat of condemnation. Because
the compensation for condemned property, severance damages, interest,
and relocation assistance can have different tax consequences, it is
important to delineate how much of the overall payment is allocable to
Condemnation Gains Are Taxable
One way of looking at condemnation is as a forced sale of property.
Title is unilaterally transferred from the owner to the condemning
authority. The courts set the price (i.e., just compensation) for this
compulsory transaction according to established legal principles. As a
result, the owner ends up receiving a sum of money for the property, but
the timing and amount of compensation are often both unplanned and
financially unfavorable-especially from a tax perspective.
As a general proposition, a condemnation gain is subject to
taxation in the year it is received unless some other tax code provision
provides otherwise. Under the Internal Revenue Code (Code), an amount
received by an owner as just compensation for the condemnation of
property in excess of the "adjusted basis" of the property is
taxable income. Under [section] 1001 of the Code, the gain from the
"sale or other disposition of property" must be recognized as
taxable income. (1) The "disposition of property" under
[section] 1001 includes gains realized from the condemnation of
property. (2) Thus, the taxable "gain" from a condemnation of
property is the amount realized (i.e., the sum of money received plus
the fair market value of any property received) less the adjusted basis
of the property (i.e., generally its cost to the owner at the time of
acquisition, adjusted for depreciation and other items). (3)
Property Owners May Delay Recognition of a Condemnation Gain
The Code contains an important exception to the general rule
requiring recognition of gains from the disposition of property; this
exception has particular relevance to property condemnations. Under
[section] 1033 of the Code, a taxpayer may defer paying tax on gains
realized from certain types of "involuntary conversions." (4)
The specific involuntary conversions covered by [section] 1033 include
the compulsory or involuntary disposition of property "as a result
of its ... condemnation or threat or imminence thereof." (5)
If the property owner reinvests the gain realized from the
condemnation (within the time required in [section] 1033) by purchasing
other property "similar or related in service or use to the
[condemned] property," then the gain does not need to be
recognized, provided that it is fully absorbed by the purchase price of
the qualified replacement property.(6) As one court has noted,
"[t]he purpose of [[section] 1033] is to relieve the property owner
of unanticipated tax liability arising from involuntary condemnation of
his property, by freeing him from such liability to the extent that he
re-establishes his prior commitment of capital within the period
provided by the statute." (7) As the Internal Revenue Service (IRS)
Office of General Counsel has explained, "[t]he purpose of
[section] 1033 was to allow taxpayers who have lost property under
certain circumstances outside their control to invest the proceeds
therefrom, undiminished by tax on the gain, in qualified replacement
property, thus restoring themselves in so far as possible, to their
position prior to the involuntary conversion." (8)
Section 1033 does not allow the property owner to avoid paying
taxes on a condemnation award altogether. Instead, [section] 1033 merely
allows the owner to delay paying such taxes until a later date. This
function is accomplished by a mandatory adjustment in the basis of the
replacement property to reflect the amount of the gain from the
condemnation. Section 1033(b)(2) provides that a taxpayer's basis
for replacement property "shall be the cost of such property
decreased in the amount of the gain [from the condemnation] not so
recognized." (9) Because the basis of the replacement property is
the touchstone for determining the taxable gain from its sale or
disposition at some point in the future, lowering the basis to reflect
the gain from the condemnation ensures that this amount will be subject
to tax in the future.
Overview of General Requirements for Electing Nonrecognition Under
To benefit from the tax-delaying effect of [section] 1033, an owner
must make a timely election of nonrecognition treatment of the gain and
make a timely purchase of qualified replacement property. A property
owner may "elect" to defer the recognition of a gain under
[section] 1033 simply by not reporting the gain on the tax return. (10)
However, IRS regulations advise taxpayers to report all of the details
in connection with an involuntary conversion of property with a gain,
including information relating to the replacement of the condemned
property, "in the return for the taxable year or years in which any
of such gain is realized." (11) The information provided should
establish the owner's entitlement to nonrecognition under [section]
1033, including a description of the replacement property showing that
it was "similar or related in service or use" to the condemned
property, the date it was acquired, and the cost to the owner.
In order to successfully secure nonrecognition treatment under
[section] 1033, the property owner must purchase qualified replacement
property within two years "after the close of the first taxable
year in which any part of the gain upon the conversion is
realized," (12) unless the condemned property was "real
property ... held for productive use in trade or business or for
investment," in which case the replacement period is extended to
three years. (13) If the property owner elects not to recognize the gain
from a condemnation but fails to purchase qualified replacement property
within the specified time period, the IRS may seek to recover a
"deficiency" for the amount of taxes that should have been
paid in the year that the gain was realized, plus interest and
In order to shield a gain from recognition for income tax purposes
(1) the replacement property must be "similar or related in service
or use to the property so converted" within the meaning of
[section] 1033(a)(2), (15) or (2) if the condemned property was held for
productive use in trade or business or for investment, the replacement
property must be "of a like kind to be held either for productive
use in trade or business or for investment" within the meaning of
[section] 1033(g)(1). The issue of what constitutes qualified
replacement property under [section] 1033 is not always clear and could
be the subject of a lengthy article all its own. However, in general the
Tax Court has held that to qualify as "similar or related in
service or use" under [section] 1033(a)(2) the appropriate test is
one of "functional use." The functional use test requires the
taxpayer to show "a reasonable degree of continuity in the nature
of the assets as well as in the general character of the
[taxpayer's use]." (16) Whether property that is held for
productive use in trade or business or for investment is of a "like
kind" under [section] 1033(g) depends upon the "nature"
or "character" of the property and not its grade or quality.
Example of the Operation of [section] 1033
In order to understand how [section] 1033 operates to defer the
taxation of a gain realized from an award of just compensation, it is
useful to work through a simple example. Assume that an entity called
"XYZ, LLC" owned a shopping center in a blighted area that is
condemned in its entirety by a redevelopment authority. XYZ's
adjusted basis in the property at the time of the taking is $1 million.
Following a trial, XYZ is awarded $10 million ,in just compensation
(exclusive of interest or any relocation assistance). Under [section]
1001 of the Code, XYZ has a gain of $9 million from this disposition of
the shopping center, for which it must pay taxes. Depending on other
factors, the tax liability for this condemnation gain could be several
XYZ elects nonrecognition treatment of the $9 million gain under
[section] 1033(a)(2) by purchasing a replacement shopping center, which
costs $15 million. Because XYZ completes this transaction within two
years of the just compensation award, it need not pay taxes on the $9
million gain realized from the taking of its shopping center. However,
XYZ's basis in the replacement shopping center is reduced from $15
million to $6 million (to reflect the nonrecognition of the $9 million
condemnation gain) pursuant to [section] 1033(b). Thus, [section] 1033
allows XYZ to defer paying taxes on its $9 million gain from the
condemnation until it sells or otherwise disposes of the replacement
shopping center in the future.
Other Possible Tax Consequences of Condemnation
There are other possible tax consequences of eminent domain that
are beyond the scope of this article. It is possible that the award of
just compensation is less than the owner's adjusted basis in the
property, in which case it produces a loss. A property owner may not
defer the recognition of a loss under [section] 1033. In addition, if
the condemned property was a capital asset or business property held for
more than one year, the owner's decision to elect nonrecognition of
a condemnation gain maybe affected by [section] 1231 of the Code, which
sets forth special rules regarding the tax treatment of gains and losses
from involuntarily converted business property and capital assets held
for more than one year. (18) The myriad of scenarios that exist and the
financial consequences of each provides good reason for an owner to
consult a tax professional when deciding how to manage the tax
consequences of condemnation.
Special Issues Related to Application of [section] 1033 to
There are several aspects of the application of [section] 1033 to
the condemnation environment that are unique. These issues include (1)
the applicability of [section] 1033 to gains realized from a sale of
property or settlement made under the threat of condemnation, (2) the
running of the time period under [section] 1033 for purchasing qualified
replacement property if the condemning authority utilizes a "quick
take" procedure or if the property owner initiates an inverse
condemnation proceeding, (3) the applicability of [section] 1033 to
interest paid on an award of just compensation and payments received
under the Uniform Relocation Assistance and Real Property Acquisition
Policies Act, (4) the applicability of [section] 1033 to severance
damages, and (5) the applicability of [section] 1033 to leasehold
condemnations. Each of these issues will be addressed in the following
Sales or Settlements Made Under the Threat of Condemnation
Frequently, condemning authorities acquire property through
negotiations after informing the owner of the intent to take or through
settlements that occur after the start of condemnation proceedings but
before trial. Section 1033 allows an owner to elect to defer recognizing
a gain on property acquired under either scenario. This means that, when
condemnation is expected to produce a taxable gain, there is no tax
disadvantage to the owner for settling the matter rather than litigating
Section 1033(a) expressly applies to property that is compulsorily
or involuntarily converted under the threat or imminence of
condemnation. (19) The Tax Court has set forth the tests a taxpayer must
meet to qualify for nonrecognition of a gain realized from a sale or
settlement made under the threat of condemnation. According to the Tax
Court, a "threat of condemnation" under [section] 1033 exists
if"(1) the body threatening condemnation possesses the power of
eminent domain, (2) the property owner is told by an official of the
threatening body that condemnation will be sought unless the owner
negotiates a sale or exchange of the property, and (3) the information
conveyed to the owner gives the owner reasonable grounds to believe that
the threat was authorized and likely to be carried out unless a sale or
exchange is arranged." (20)
The existence of a threat of condemnation is "judged from the
seller's perspective taking into account all facts known at the
time of the sale."(21) A threat of condemnation will be found if
the property owner might reasonably believe from the representations of
the condemning authority's agents and from surrounding
circumstances that condemnation was likely to occur if the owner did not
sell. A threat will not be found "where it should have appeared to
the owner that the chance of condemnation was remote." (22)
For example, in one case the Tax Court considered a disposition and
development agreement between the owner of a car dealership and a
redevelopment authority. Under the agreement, the owner agreed to sell
its current location to the redevelopment authority and move to a new
auto mall after the redevelopment authority had threatened to condemn
the dealership's property. The Tax Court held that the agreement
was made in response to an imminent condemnation and that the owner
could defer the gain realized from this disposition under [section]
1033. (23) In addition, the IRS has ruled that the sale of property to a
local government following the enactment of an ordinance authorizing the
taking of the property was a sale made under threat of condemnation for
purposes of [section] 1033. (24)
Establishing that a sale of property was made under threat of
condemnation is a potential hurdle to the right to elect nonrecognition
under [section] 1033. Consequently, a property owner may want to ensure
that the condemning authority's right to take and intent to take
have been appropriately documented in writing. In addition, the owner
may want to insist that any settlement or sales agreement include
language setting forth the parties' mutual understanding that
agreement was reached only as an alternative to condemnation.
Start of the Time Period for Obtaining Qualified Replacement
As discussed above, a property owner who wants to elect
nonrecognition treatment of a gain caused by a condemnation must
purchase a replacement property within a specified two-year or
three-year period. (25) Given the nature of locating certain kinds of
real property, negotiating its sale, and finalizing the transaction, the
replacement process may take a fair amount of time. Thus, it is
important for property owners to understand when the statutory time
period for obtaining replacement property starts to run. The answer
depends on the manner in which the condemning authority obtains title to
the condemned property.
The start of the two-year or three-year period for obtaining
qualified replacement property starts in the year "in which any
part of the gain upon the conversion is realized." (26) Condemning
authorities frequently initiate a taking through a statutory "quick
take" procedure, pursuant to which they simultaneously file a
condemnation petition and deposit into the registry of the court the
estimated amount of just compensation due to the owner. (27) The owner
is generally allowed to withdraw this amount, subject to an obligation
to pay back any excess if the just c0mpensati0n is less than the
deposited amount. (28) The litigation of the condemnation proceeding may
take a year or more. Despite the fact that the amount of the
owner's just compensation has not yet been finalized, the Tax Court
has held that the time period for purchasing replacement property starts
to run when the owner withdraws the deposit from the registry of the
court. (29) The Tax Court has reasoned that under the "claim of
right doctrine," the condemnation deposit is "realized to the
taxpayer in the year received even though at the time of receipt
conditions exist which require the tax payer to return all or part of
such sums." (30)
Conversely, if a condemning authority through its actions takes
property without initiating formal proceedings, an owner may assert a
right to just compensation by bringing an action for "inverse
condemnation." (31) Because the government has allegedly interfered
with the owner's property without filing a formal condemnation
petition, there is no condemnation deposit for the owner to withdraw.
Instead, the government has no obligation to pay any just compensation
unless and until a judgment is entered against the government following
trial. Th us, in an inverse condemnation proceeding, the owner usually
does not receive any gain from the condemnation property until after
trial, and the statutory time period for obtaining replacement property
likewise does not begin to run until after trial. (32) However, if the
government does pay some compensation for damage caused to property even
though it did not initiate condemnation proceedings and denies takings
liability, the owner's receipt of the compensation prior to filing
a complaint for inverse condemnation nevertheless triggers the running
of the statutory replacement period. (33)
Applicability of [section] 1033 to Interest and Payments Under
It is not uncommon for just compensation to include payments for
interest and possibly for assistance provided by the Uniform Relocation
Assistance and Real Property Acquisition Policies Act of 1970 (URARPA).
Section 1033 does not apply to either of these types of payments. Thus,
the portion of money received in a condemnation proceeding or settlement
for interest is taxable as ordinary income and cannot be deferred.
However, under a special provision in URARPA, payments received under
the act are exempt from federal income tax. The special treatment of
these items of income may justify special drafting considerations in any
agreement or final judgment.
Under the Fifth Amendment, an owner is entitled to both the fair
market value of the property taken and interest on that amount when
payment is delayed. (34) However, interest received on an award of just
compensation is not subject to nonrecognition under [section] 1033. (35)
Instead, the interest is treated as ordinary income and must be reported
in the year in which it is received. (36) The Tax Court has reasoned
that [section] 1033 "does not afford nonrecognition of all
gains" related to the involuntary conversion of property. (37)
Instead, [section] 1033 only applies to "gain derived from the
property itself" and not interest, which is "compensation for
the delay in payment of the sale price." (38) In the event of a
pre-trial settlement in which the parties did not allocate a portion of
the settlement amount as interest, the courts may "inquire into the
true make-up of the final settlement" and "apportion that
settlement in conformity with the realities of the bargaining between
the parties." (39)
Under URARPA, certain displaced persons may be entitled to
statutory payments for moving and related expenses, for replacement
housing for homeowners, and for replacement housing for tenants and
certain others. (40) Congress included in URARPA a provision expressly
exempting payments received under the act from federal income taxation.
(41) Thus, "payments expressly authorized by [URARPA] and in excess
of the just compensation paid for taken property are exempted from
If the IRS challenges a property owner's election of
nonrecognition treatment of a condemnation gain under [section] 1033,
the parties may end up in a factual dispute about how much of the
condemnation payment was allocable to interest and payments under
URARPA. The IRS has an incentive to argue that more of the payment
received from the condemning authority was for interest than
compensation for property. The owner will have an incentive to
demonstrate exactly how much of the amount received was under URARPA,
which is exempt from taxation. To avoid such uncertainty, it may be wise
for the property owner to insist on an itemized breakdown of any
condemnation payment, including interest and URARPA payments, whether
the payment results from an agreement with the condemning authority or a
judgment entered by a court.
Applicability of [section] 1033 to Severance Damages
When the condemning authority takes only part of a tract of
property, the owner is entitled to just compensation for any reduction
in value to the remainder of the tract attributable to the partial
taking. (43) The diminution in the value of the remainder caused by a
partial taking is known as "severance damages."
Severance damages pose an interesting problem under [section] 1033
because they technically do not represent the involuntary conversion of
property into "similar property" or "money," which
is the type of gain to which [section] 1033 expressly applies. Severance
damages are not paid to compensate an owner for the loss of a property
interest, they are paid to reimburse the owner for a decrease in the
value of property that the owner still retains. Nevertheless, severance
damages can constitute a significant involuntarily realized gain caused
by a condemnation.
The IRS, the Tax Court, and the federal courts have interpreted
[section] 1033 in such a way that an owner can achieve complete
nonrecognition of severance damages, albeit with a twist. The
nonrecognition of severance damage is accomplished in two parts. First,
the cost basis of the remaining portion of the condemned tract is
reduced by the amount of severance damages. (44) As the IRS has
The amount of severance damages that exceeds the adjusted basis of
the remainder (and are therefore treated as a taxable gain) may be
deferred under [section] 1033 by the purchase of qualified replacement
Revenue Ruling 83-49 provides an example of how a property owner
might avoid recognition of a gain attributable to severance damages.
(47) In this ruling, the property owner had owned agricultural land and
buildings with an adjusted basis of $220,000. (48) A portion of the
owner's tract was condemned for a state highway project, and the
property owner received just compensation of $175,000 for the property
actually taken and $135,000 for the diminution in the value of the
remainder of the tract. The owner subsequently purchased qualified
replacement property for $350,000.
The IRS considered the issue of whether the property owner could
defer the recognition of gain realized from the award of $135,000 for
severance damages. First, the IRS determined how much of the severance
damages constituted a taxable gain. Based on the portion of the tract
that remained, the IRS allocated $80,000 of the tract's adjusted
basis to the remainder. As such, after reducing the adjusted basis of
the remainder by the amount of severance damages ($135,000-$80,000), the
taxpayer was left with excess severance damages of $55,000, which the
IRS determined was the taxable gain attributable to severance damages.
The IRS then concluded that, because the taxpayer had made a timely
election under [section] 1033 and had purchased qualified replacement
property, the taxpayer had successfully triggered nonrecognition
treatment of the gain realized from severance damages.
As with other components of the payment received from a condemning
authority, a property owner may want to insist on language in the
settlement agreement or judgment that clearly spells out which portion
of the payment is for severance damages. Given that the gain realized
from severance damages can be offset by the basis in the remaining
property (which is not possible for the gain received for the condemned
property), this issue may potentially be the subject of dispute with the
IRS. In order to avoid the uncertainty of litigation in which a court
must ascertain the parties' intent from an unclear record, the
property owner may want to insist that the amount of severance damages
be itemized in any agreement or judgment.
Applicability of [section] 1033 to Temporary Takings
Another unique application of [section] 1033 to the condemnation
arena involves takings of real property for a limited period of time,
such as a leasehold condemnation of office space or a temporary
construction easement. Despite a conflicted history, it appears that
payments received for temporary takings are subject to nonrecognition
under [section] 1033, provided the owner purchases qualified replacement
property within the specified time period.
The measure of just compensation for a temporarily taking is the
"fair rental value of the property for the period of the
taking." (49) Fair market rent is "the rental price in cash,
or its equivalent, that the leasehold would have brought at the time of
the taking, if then offered for rent in the open market." (50)
In 1953, the IRS issued Revenue Ruling 38, which opined that just
compensation received by a taxpayer for a temporary taking of a
warehouse was not subject to nonrecognition under [section] 1033 because
a leasehold condemnation was not an involuntary disposition of property.
(51) The IRS stated that just compensation for a leasehold taking is
rental remuneration for use pursuant to a leasehold interest in the
property and should thus be taxed as ordinary rental income. (52)
The IRS has issued a number of rulings that indicate it may have
backed away somewhat from this interpretation of [section] 1033 in the
context of temporary takings. In 1974, the IRS's Office of General
Counsel recommended that Revenue Ruling 38 be modified "to reflect
a position that the lease granted to the United States Government is
property for purposes of section 1033." (53) In 1992, the IRS
issued a private letter ruling holding that the recognition of a gain
from a temporary taking of construction easements could be deferred
under [section] 1033 by the timely purchase of a qualified replacement
property. (54) In 1983, the IRS issued a revenue ruling holding that a
tenant whose lease was taken by the government could avoid recognition
of the condemnation proceeds by purchasing replacement property under
[section] 1033. (55) However, the IRS has yet to expressly overrule
Revenue Ruling 38 by addressing the nonrecognition under [section] 1033
of a condemnation gain realized by the fee owner of an office building
or warehouse as a result of a temporary taking.
An awareness of the tax treatment of condemnation awards can be
crucial to managing an owner's net return from the involuntary
conversion of property through eminent domain. As demonstrated above,
there are many potentially complex issues and considerations, including
whether an owner is better off recognizing a condemnation gain in the
year it is received or electing to defer recognition through the
purchase of qualified replacement property. Depending on the
owner's situation, seeking advice from a tax professional may be
essential to making the best decisions regarding negotiations or
litigation strategy. Moreover, the differing tax treatment of the
various components of the amount ultimately paid by a condemning
authority may justify drafting the agreement or judgment with these tax
issues in mind.
(1.) 26 U.S.C. [section] 1001.
(2.) Likins-Foster Honolulu Corp. v. Commissioner of Internal
Revenue, 417 F.2d 285, 289 (10th Cir. 1969); Feinberg v. Commissioner of
Internal Revenue, 377 F.2d 21, 27 (8th Cir. 1967); Wilson v.
Commissioner of Internal Revenue, 72 T.C.M. (CCH) 628, 1996 WL 525288
(September 17, 1996).
(3.) 26 U.S.C. [section] 1001(a) (general rule); 26 U.S.C.
[section] 1011 (describing adjusted basis).
(4.) 26 U.S.C. [section] 1033(a).
(6.) 26 U.S.C. [section] 1033(a)(2); see also, 26 U.S.C. [section]
1033(g) (addressing how a taxpayer may defer recognition of a gain
realized from an involuntary conversion of "real property held for
productive use in trade or business or for investment").
(7.) Filippini v. United States, 318 R2d 841, 844 (9th Cir. 1963).
(8.) Internal Revenue Service, General Counsel Memorandum No.
39182, 1984 WL 264962 (October 6, 1982).
(9.) 26 U.S.C. [section] 1033 (b)(2); this section also provides
that if the taxpayer buys more than one piece of replacement property,
"the basis determined shall be allocated to the purchased
properties in proportion to their respective costs."
(10.) 26 C.F.R. [section] 1.1033(a)-2(c)(2).
(12.) 26 U.S.C. [section] 1033(a)(2)(B)(i). The IRS regulations
provide that a taxpayer may receive an extension of time to elect
nonrecognition treatment under [section] 1033 if it is shown "to
the satisfaction of the [IRS] district director" that the taxpayer
had reasonable cause for not having filed the application within the
required time period and "reasonable cause for not being able to
replace the converted property within the required period of time."
26 C.F.R. [section] 1.1033(a)-2(c)(3).
(13.) 26 U.S.C. [section] 1033(g)(4).
(14.) 26 C.F.R. [section] 1.1033(a)-2(c)(5); Bruce N. Edwards, et
al., 568-3d BNA Tax Management: Involuntary Conversions, A-39 (Bureau of
National Affairs, Inc.: Tax Management Portfolio, 1999).
(15.) Under [section] 1033(a)(2), a taxpayer may also qualify for
nonrecognition of a condemnation gain by purchasing "stock in the
acquisition of control of a corporation" that owns property similar
or related in service or use to the property that was condemned. Because
of space constraints, we are limiting our focus to the purchase of
qualified replacement property rather than the purchase of a controlling
interest in corporations that own qualified replacement property, which
entails a host of unique issues.
(16.) Maloof v. Commissioner of Internal Revenue, 65 T.C. 263,
(17.) 26 C.F.R [section] 1.1033(g)-1 (a) (stating that whether
replacement property is of like kind is determined by the principles set
forth in 26 C.F.R. [section] 1.1031 (a)-1).
(18.) Edwards, et al., A-3 to A-4.
(19.) 26 U.S.C. [section] 1033(a).
(20.) Johnson v. Commissioner of Internal Revenue, 76 T.C.M. (CCH)
1035, 1998 WL 892267 (1998) (citing cases).
(21.) Tecumseh Corrugated Box Co. v. Commissioner of Internal
Revenue, 94 T.C. 360, 376-77 (1990).
(22.) Johnson v. Commissioner of Internal Revenue, (citing Ranier
Cos. v. Commissioner of Internal Revenue, 61 T.C. 68, 76 (1973),
rev'd and remanded on other grounds, 538 F.2d 338 (9th Cir. 1975)).
(23.) Johnson v. Commissioner of Internal Revenue.
(24.) Rev. Rul. 89-2, 1989-1 C.B. 259 (1989).
(25.) 26 U.S.C. [section] 1033(a)(2)(B)(i), 1033(g)(4).
(26.) 26 U.S.C. [section] 1033(a)(2)(8)(i).
(27.) See for example, 40 U.S.C. [section] 258a (stating that
"[u]pon the filing said declaration of taking and of the deposit in
the court, to the use of the persons entitled thereto, of the amount of
the estimated compensation stated in said declaration, title to the said
lands in fee simple absolute, or such less estate or interest therein as
is specified in said declaration, shall vest in the United States of
America, and said lands shall be deemed to be condemned and taken for
the use of the United States, and the right to just compensation for the
same shall vest in the persons entitled thereto").
(28.) See for example, 40 U.S.C. [section] 258a (stating that
"[u]pon the application of the parties in interest, the court may
order that the money deposited in the court, or any part thereof, be
paid forthwith for or on account of the just compensation to be awarded
in said proceeding. If the compensation finally awarded in respect of
said lands, or any parcel thereof, shall exceed the amount of the money
so received by any person entitled, the court shall enter judgment
against the United States for the amount of the deficiency"); Fed.
R. Civ. R 71A(j) (stating that "[i]f the compensation finally
awarded to any [owner] is less than the amount which has been paid to
that [owner], the court shall enter judgment against that [owner] and in
favor of the [government] for the overpayment").
(29.) Wilson v. Commissioner of Internal Revenue, 72 T.C.M. (CCH)
628, 1996 WL 525288 (September 17, 1996) (citing cases).
(31.) See, United States v. Clarke, 445 U.S. 253, 257 (1980)
(stating that inverse condemnation is "a shorthand description of
the manner in which a landowner recovers just compensation for a taking
of his property when condemnation proceedings have not been
(32.) Edwards, et al., A-8.
(33.) In re Mahon, Case No. 96-03845-6JI, 1998 WL 953984, 98-2
U.S.T.C. [paragraph] 50,864 (M.D. Fla. 1998).
(34.) Seaboard Air Line Ry. Co. v. United States, 261 U.S. 299, 300
(35.) Vezey v. United States, D.C. No. CV-96-00055-HRH, 1999 WL
685961 (9th Cir. 1999).
(36.) Ibid., (citing Kieselbach v. Commissioner of Internal
Revenue, 317 U.S. 399, 403 (1943)); Estate of Walter v. Commissioner of
Internal Revenue, 30 T.C.M. (CCH) 1051, 1971 WL 2313 (September 27,
(37.) Tiefenbrunn v. Commissioner of Internal Revenue, 74 T.C.
1566, 1572 (1980).
(39.) Estate of Walter v. Commissioner of Internal Revenue; see
also, Vezey v. United States.
(40.) 42 U.S.C. [subsection] 4622 to 4624.
(41.) 42 U.S.C. [section] 4636.
(42.) Nielsen v. Commissioner of Internal Revenue, 110 T.C. 159
(43.) United States v. Dickinson, 331 U.S. 745, 750-51 (citing
Bauman v. Ross, 167 U.S. 548 (1897)).
(44.) Internal Revenue Service, General Counsel Memorandum No.
38968, 1983 WL 197818 (April 29, 1983); see also, E.R. Hitchcock Co. v.
United States, 514 F.2d 484 (2d Cir. 1975); Vaira v. Commissioner of
Internal Revenue, 444 F.2d 770, 774 & n.6 (3d Cir. 1971); Rev. Rul.
68-37, 1968-1 C.B. 359 (1968).
(45.) Internal Revenue Service, General Counsel Memorandum No.
(46.) McKitrick v. United States, 373 F. Supp. 471, 473 (S.D. Ohio
1974); Conran v. United States, 322 F. Supp. 1055, 1057-58 (E.D. Mo.
1971); Rev. Rul. 83-49, 1983-1 C.8.191, 1983 WL 189965 (March 21, 1983).
(47.) Rev. Rul. 83-49.
(48.) In the revenue ruling, the IRS abbreviated all sums of money
as "$220x dollars," "$1 75x dollars," and so forth.
For the sake of clarity, these figures have been converted into the
nearest hundred thousand dollars.
(49.) Yuba Nat'l. Resources, Inc. v. United States, 904 Ir. 2d
1577, 1581 (Fed. Cir. 1990), (citing Kimball Laundry Co. v. United
States 338 U.S. 1, 7 (1949)); see also, United States v. General Motors
Corp., 323 U.S. 373, 382 (1945).
(50.) United States v. 1735 North Lynn Street, Situated in Rosslyn,
Arlington County, Va., 676 F. Supp. 693, 706 (E.D. Va. 1987).
(51.) Rev. Rul. 38, 1953-1 C.B. 16(1953).
(53.) Internal Revenue Service, General Counsel Memorandum No.
39182, 1984 WL 264962 (October 6, 1984) (discussing General Counsel
Memorandum No. 35767 (April 4, 1974)).
(54.) Internal Revenue Service, Priv. Ltr. Rul. 9248025 (August 31,
(55.) Rev. Rul. 83-70, 1983-1 C.B. 189, 1983 WL 190105 (April 25,
David S. Black, JD, is an attorney at Holland & Knight LLP. He
works in the firm's northern Virginia office and practices in
litigation involving land use, eminent domain, commercial, and
government contract disputes. He is a graduate of Georgetown University
Law Center. Contact: Holland & Knight LLP, 1600 Tysons Boulevard,
Suite 700, McLean, VA, 22102; T 703-720-8680; F 703-720-8610; E-mail:
Charles A. Neff, JD, is an attorney at Holland & Knight LLR, He
works in the firm's northern Virginia office and practices in
transactions and disputes regarding land use, zoning, and corporations.
He is a graduate of the University of Virginia. Contact: Holland &
Knight LLP, 1600 Tysons Boulevard, Suite 700, McLean, VA, 22102; T
703-720-8025; F 703-720-8610; E-mail: email@example.com
[Severance damages] do not constitute an 'amount
realized' from the sale of the condemned property for
purposes of calculating gain or loss on the sale or exchange
thereof. Rather they reduce the basis of the
damaged portion, and any excess of the severance
damages over the basis is taxable gain. (45)