PLR 1348007: IRS permits gain from an eminent-domain payment to be reported outside the installment method

Plain-English summary

A corporation received an initial payment when a state seized its property under eminent domain law and deferred gain recognition under IRC § 1033 while it pursued a claim for additional compensation. After converting from a C corporation to a real estate investment trust, it received a final judgment that included additional just compensation, interest, and costs. The IRS ruled that the taxpayer could recognize the gain on the additional compensation in the judgment year using a method other than the installment method under IRC § 453. It also ruled that the payment would not be subject to the tax under Treas. Reg. § 1.337(d)-7, based on the ruling under IRC § 1374(d)(7)(C).

Ruling snapshot

• Question: Could the taxpayer recognize gain on additional eminent-domain compensation in the judgment year without using the installment method, and would the payment avoid the tax under Treas. Reg. § 1.337(d)-7?
• Outcome: approved
• Key authorities: IRC §§ 453, 1033, 1374, and 1374(d)(7)(C); Treas. Reg. § 1.337(d)-7

Full text (IRS public release)

Internal Revenue Service                         Department of the Treasury
                                                 Washington, DC 20224

Number: 201348007                                Third Party Communication: None
Release Date: 11/29/2013                         Date of Communication: Not Applicable
Index Number: 1374.00-00, 453.10-02
                                                 Person To Contact:
----------------------------------               ----------------------------, ID No. --------------
--------------------------                       -----------------
------------------------------------------       Telephone Number:
----------------------------------               --------------------
------------------------------------             Refer Reply To:
                                                 CC:ITA:B04
                                                 PLR-113874-13
                                                 Date:
                                                 August 28, 2013


LEGEND:

Taxpayer       =   -------------
State          =   -------------
x              =   -------------------
y              =   -----------------
z              =   -------------------
Month 1        =   ----------------------
Date 1         =   -----------------
Year 1         =   -------

Dear -------------:

This letter responds to your request for rulings under § 453 of the Internal Revenue
Code and § 1.337(d)-7 of the Income Tax Regulations concerning the $z payment that
Taxpayer received as just compensation for property seized by State.

                                             FACTS

During Month 1, State seized property that Taxpayer owned under State eminent
domain law and paid Taxpayer $x. Pursuant to that law, Taxpayer treated the $x
payment as partial compensation while pursuing a claim against State for just
compensation for the seized property. Taxpayer deferred recognition of the gain on the
$x payment under § 1033. On Date 1, Taxpayer converted from a C Corporation to a
REIT. In Year 1, after vigorous litigation extending over several years, Taxpayer was
awarded a final judgment of $y, of which $z was additional just compensation for the
seizure and the remainder was interest and costs. If Taxpayer receives the rulings it
has requested, Taxpayer intends to include the gain on the $z payment on its Year 1
federal income tax return.
PLR-113874-13                                2

                                          LAW

Section 453(a) provides, in general, that income from an installment sale is taken into
account under the installment method. Under § 453(b) (1) an installment sale means a
disposition of property where at least 1 payment is to be received after the close of the
taxable year in which the disposition occurs.

                                        RULINGS

Ruling 1: Based strictly on the facts taken together that Taxpayer’s property was seized
by State, Taxpayer vigorously litigated the amount of the just compensation in State
courts over several years, and the $z payment was pursuant to an adverse final
judgment of the State court, we rule that Taxpayer may properly recognize the gain on
the $z payment on its Year 1 federal income tax return, using a method of accounting
other than the installment method under § 453.

Ruling 2: Based strictly on Ruling 1, we rule that if Taxpayer reports the $z payment on
its Year 1 federal income tax return, the payment will not be subject to tax under
§ 1.337(d)-7 of the Income Tax Regulations. Section 1374(d)(7)(C).

Except as expressly provided in rulings 1 and 2, we do not express or imply an opinion
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.

The taxpayer must attach a copy of this letter to any income tax return to which it is
relevant. Alternatively, a taxpayer filing its returns electronically may satisfy this
requirement by attaching a statement to the return that provides the date and control
number of the letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by 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.
PLR-113874-13                                3

In accordance with the Power of Attorney on file with this office, we will send a copy of
this letter to your authorized representative.

                                      Sincerely,



                                      Michael J. Montemurro
                                      Chief, Branch 4
                                      Office of Associate Chief Counsel
                                      (Income Tax & Accounting)




cc: