## Facts

- A taxpayer owned real property used for a particular intended purpose.
- The property became chemically contaminated and, as a result, was rendered unsafe for its intended use.
- After the contamination, a governmental authority adopted an ordinance authorizing eminent domain proceedings affecting the property.
- The taxpayer subsequently sold the contaminated property to the governmental authority.
- The taxpayer sought to treat the event as an involuntary conversion under I.R.C. § 1033, including treatment as a sale under threat of condemnation.

## Issues

1. Whether real property rendered unsafe for its intended use due to chemical contamination is treated as “destroyed” for purposes of I.R.C. § 1033(a).
2. Whether a sale of contaminated property to a governmental authority after adoption of an ordinance authorizing eminent domain proceedings is a sale “under threat or imminence of condemnation” under I.R.C. § 1033(a) and (g).
3. Whether, and to what extent, sale proceeds must be shown to represent compensation for a governmental taking to qualify for § 1033 condemnation-related treatment.

## Decision

- Property rendered unsafe for its intended use as a result of chemical contamination is treated as destroyed for purposes of I.R.C. § 1033(a).
- A subsequent sale of the contaminated property to a governmental authority after passage of an ordinance authorizing eminent domain proceedings constitutes a sale under threat of condemnation for purposes of I.R.C. § 1033(a) and (g).
- The condemnation-related characterization applies only to the extent the taxpayer can establish that the proceeds represent compensation for the taking of the property by the government.

## Legal Principles

- For I.R.C. § 1033(a), “destruction” is not limited to physical annihilation; property may be treated as destroyed when it becomes unsafe for its intended use due to chemical contamination.
- A disposition can qualify as a sale under threat or imminence of condemnation when governmental action has advanced to formal authorization of eminent domain proceedings and the property is sold to the governmental authority.
- Under I.R.C. § 1033(a) and (g), nonrecognition treatment in condemnation-related transactions is limited to amounts properly characterized as compensation for the governmental taking, and taxpayers bear the burden of substantiating that characterization.

## Conclusion

The ruling concludes that chemical contamination rendering property unsafe constitutes “destruction” under § 1033(a) and that, after an ordinance authorizing eminent domain, a sale to the government may be treated as made under threat of condemnation under § 1033(a) and (g), but only for proceeds proven to be compensation for the governmental taking.


Rev. Rul. 89-2, 1989-1 C.B. 259 (1989)