PLR 1252010: IRS allows section 1033 deferral for utility relocation reimbursements

Plain-English summary

The IRS ruled that a public utility could elect to defer gain under section 1033 on payments it received for removing and relocating utility equipment at the direction of a condemning authority. The utility had to reinvest the amounts in property similar or related in service or use, including affected property or equipment, within the statutory replacement period. The ruling treated the relocation reimbursement as part of the involuntary conversion proceeds. The utility also could not deduct or capitalize the reimbursed removal and relocation costs to the extent they were attributable to those payments.

Ruling snapshot

• Question: Could the utility defer gain on payments reimbursing required equipment removal and relocation?
• Outcome: Approved
• Key authorities: IRC § 1033(a)(2); Rev. Rul. 58-396; Graphic Press, Inc. v. Commissioner, 523 F.2d 585 (9th Cir. 1975)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201252010 Third Party Communication: None
Release Date: 12/28/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1033.02-00 --------------------------, ID No. -----------------
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Telephone Number:

                                                            --------------------

-------------------------------------------------- Refer Reply To:
------------------------ CC:ITA:B04
----------------------- PLR-122194-12
Date:
August 31, 2012

TY: --------------------------

LEGEND:

Taxpayer = ----------------------------------------------------------------------------
Year 1 = -------
Year 2 = -------
Date 1 = ------------------------
Date 2 = -------------------
Date 3 = ----------------
Date 4 = ----------------------
New Turnpike = --------------------------
Route 1 = ------------------------------------------------------------------------------------ -----
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
-----------------------------------------
State X = -------------
State Y = --------
Authority = ---------------------------------------------------

Dear ---------------

This responds to your request for a private letter ruling, dated May 22, 2012, regarding
the application of § 1033 of the Internal Revenue Code to payments received for
removing and relocating utility equipment, as required by the Authority (the condemning
authority).

FACTS:

Taxpayer, a State X limited liability company, is a public utility engaged in the business
of electricity transmission and distribution in State Y. Taxpayer uses the annual
accounting period ending December 31 and the overall accrual method of accounting.
PLR-122194-12 2

Authority, a political subdivision of State Y, builds and operates turnpikes. It may use
eminent domain to acquire real property that it determines necessary and appropriate to
construct and efficiently operate turnpikes. If Authority determines that relocation of a
public utility facility is necessary, the owner-operator of the facility must, by law, relocate
or remove the facility in accordance with the requirements of Authority, in a manner that
does not impede the design, financing, construction, operation, or maintenance of a
turnpike project. Authority must pay the cost of the relocation or removal.

In Year 1, Authority notified Taxpayer that it intended to construct New Turnpike along
Route 1 and that some of Taxpayer’s electricity transmission structures infringed on the
New Turnpike right of way.1 Authority ordered Taxpayer to relocate the infringing
facilities to accommodate the construction of New Turnpike, and they set a schedule for
the removal and relocation to be completed by Date 3. In Year 2, Taxpayer began the
engineering and design process necessary for the relocation.

When Authority requires Taxpayer to relocate a utility facility, the standard practice is for
Taxpayer to pay the expenses of the relocation and seek reimbursement after relocation
occurs. Taxpayer followed the standard procedure for this relocation project. Because
Taxpayer provided the initial funding, Taxpayer did not begin the relocation until the
relevant government agencies reviewed the scope of the work necessary and agreed to
reimburse the relocation expenditures. Thus, during Year 2, Taxpayer submitted its
costs estimates to tear down, relocate and install new utility facilities. On Date 1,
Authority agreed to the scope of the work and cost estimates and authorized the project.
Authority agreed to reimburse only actual expenses reduced by the salvage value of
any existing materials, the cost of “betterments,” and a credit for extended service life.
Taxpayer completed the relocation project on Date 2, ahead of schedule. On or about
Date 4, Authority sent Taxpayer a check in full reimbursement of its relocation costs for
this project.

APPLICABLE LAW & ANALYSIS:

Section 1033(a)(2)(A) generally provides that if property is compulsorily or involuntarily
converted into money or into property not similar or related in service or use to the
converted property, and if the taxpayer –

(i) during the replacement period specified in subparagraph (B),
(ii) for the purpose of replacing the property so converted,
(iii) purchases other property similar or related in service or use to the property so
converted,

1
The land which Authority’s turnpike occupies is owned by Authority. Authority grants right-of-ways at no
cost to Taxpayer as needed for Taxpayer’s placement of its electric utility facilities.
PLR-122194-12 3

then, at the election of the taxpayer, the gain shall be recognized only to the extent that
the amount realized upon such conversion (regardless of whether such amount is
received in one or more taxable years) exceeds the cost of such other property.

Section 1033(a)(2)(B) generally provides that the replacement period referred to in
subparagraph (A) shall be the period beginning with the date of the earlier of the
disposition of the converted property, or the threat or imminence of requisition or
condemnation of the converted property, and ending 2 years after the close of the first
taxable year in which any part of the gain upon the conversion is realized.

In Rev. Rul. 58-396, 1958-2 C.B. 403, a taxpayer’s residence was condemned to make
way for a highway. Under the terms of the condemnation award, in addition to receiving
money, the taxpayer was permitted to remove the residence from the condemned
property to a lot purchased by the taxpayer following the condemnation. The taxpayer
also purchased a second residential property with the proceeds of the condemnation.
The cost of the new properties plus the cost of moving the house from the condemned
property to one of the new properties exceeded the monetary award received by the
taxpayer. Rev. Rul. 58-396 holds that the costs incurred in purchasing the new
properties and moving the old house to one of the new properties constitute a
replacement, within the meaning of § 1033, of the property involuntarily converted.
Thus, because the cost of the replacement property, including the cost of moving the
old residence to the new property, exceeded the condemnation award, full deferral of
gain was permitted.

In Graphic Press, Inc. v. Commissioner, 523 F.2d 585 (9th Cir. 1975), the Court held
that a condemnation award that included the cost of moving heavy equipment qualified
for deferral under § 1033. There, the California Department of Public Works notified the
taxpayer that the State of California intended to condemn the Taxpayer’s property in
connection with the widening of the San Bernardino Freeway. The State condemned
the taxpayer’s land, building and fixtures, including machinery. As part of its rationale
for concluding that the compensation for moving costs qualified, the Court stated:

Section 1033 is a relief provision. Its purpose is “to aid the taxpayer where he in
good faith quickly transforms everything he received into property ‘similar or
related in … use.”’ Commissioner v. Babcock, 259 F.2d 689, 692 (9th Cir. 1958)
(interpreting predecessor to § 1033). See also, Winter Realty & Construction Co.
v. Commissioner, 149 F.2d 567, 569-70 (2d Cir.), Cert. denied 326 U.S.
754(1945). . . .

We believe compensation in excess of land and building payments in this case
qualifies for § 1033 treatment. From the taxpayer’s viewpoint, he is being
compensated for a loss due to the condemnation of his property. Whatever
payment the taxpayer receives is attributable to the involuntary conversion.
PLR-122194-12 4

Where, as here, a payment is made for relocation costs in addition to land costs,
as long as Taxpayer reinvests the total award into other property similar or
related in service or use within the statutory period, both the language and spirit
of the statute are met.

Graphic Press, 523 F.2d at 589.

As in Graphic Press, the present case involves a conversion that includes an award for
removal and relocation costs. Taxpayer will use the proceeds from the conversion to
achieve the same economic position it enjoyed before with respect to the affected
property. In the present case, the language and spirit of the statute are met because
the form, nature or use of Taxpayer's business property resulting from the conversion
and reinvestment will remain substantially the same.

RULING:

Taxpayer may elect to defer gain under § 1033 on payments it receives for removing
and relocating utility equipment as required by Authority, provided the amounts received
are reinvested in other property similar or related in service or use to the property
converted and for removal and relocation of affected property or equipment within the
replacement period under § 1033(a)(2)(B).

CAVEATS:

The above ruling is conditioned on Taxpayer neither deducting nor capitalizing the
removal and relocation costs incurred by Taxpayer to the extent such costs are
attributable to reimbursement amounts received from Authority. Except as expressly
provided herein, no opinion is expressed or implied concerning the tax consequences of
any aspect of any transaction or item discussed or referenced in this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative(s).

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The ruling contained in this letter is based upon information and representations
submitted by Taxpayer and accompanied by a penalty of perjury statement executed by
PLR-122194-12 5

an appropriate party. While this office has not verified, any of the material submitted in
support of the request for rulings, it is subject to verification on examination.

                                  Sincerely,



                                  Christina M. Glendening
                                  Assistant to the Branch Chief, Branch 4
                                  Office of Associate Chief Counsel
                                  (Income Tax & Accounting)

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