## Facts

- Arnold and Vida Santucci owned and operated a car-wash business in Richmond, California, located on leased land.
- In 1968, the San Francisco Bay Area Rapid Transit District condemned the property through eminent domain.
- The condemnation resulted in an award of about $53,460 paid to the Santuccis for personal property connected with the car wash.
- The Santuccis used the award proceeds to buy a printing company.
- On their 1968 federal income-tax return, the Santuccis reported the condemnation proceeds as long-term capital gain and did not claim deferral under I.R.C. § 1033.
- The Commissioner determined a deficiency, asserting that the condemnation proceeds were taxable as ordinary income and that the Santuccis had not made a valid § 1033 election.
- The Santuccis petitioned the United States Tax Court and argued that the gain should not be recognized under § 1033 because the proceeds were reinvested in replacement property after an involuntary conversion.

## Issues

1. Whether the Santuccis made a timely and effective election under I.R.C. § 1033(a) to obtain nonrecognition of gain from the 1968 condemnation award.
2. Whether taxpayers who file a return reporting the condemnation proceeds as taxable gain, without claiming § 1033, may later assert § 1033 nonrecognition after the statutory replacement/election period has run.
3. Whether, absent a valid § 1033 election, the Commissioner’s treatment of the condemnation proceeds as taxable income (ordinary income as determined in the notice of deficiency) should be sustained.

## Decision

- The Tax Court held that the Santuccis did not make an effective § 1033 election within the time required by the statute and applicable rules for the year at issue.
- The court treated the Santuccis’ 1968 return position—reporting the award as taxable long-term capital gain and not invoking § 1033—as an election not to apply § 1033 for that year.
- Because no timely § 1033 election was made, the court did not allow nonrecognition of the condemnation gain based on the later purchase of the printing company.
- The Tax Court sustained the Commissioner’s deficiency determination, resulting in current recognition of the condemnation award gain.

## Legal Principles

- I.R.C. § 1033 provides nonrecognition for gain realized from an involuntary conversion (including condemnation) only if the taxpayer both acquires replacement property within the statutory replacement period and makes a timely election for § 1033 treatment.
- A § 1033 election generally must be made by filing the return for the year the gain is realized in a manner consistent with § 1033 (or by taking proper action within the election period allowed by law); reporting the gain as taxable without claiming § 1033 is treated as an election not to use § 1033 for that year.
- A taxpayer may not convert a transaction from fully taxable reporting to § 1033 nonrecognition after the statutory time for replacement and election has expired.
- The taxpayer bears the burden of showing entitlement to § 1033 relief, including proof of a timely election and compliance with the statutory timing rules.

## Conclusion

In *Santucci v. Commissioner*, the Tax Court held that the Santuccis could not obtain § 1033 nonrecognition for gain from a 1968 condemnation award because they failed to make a timely § 1033 election and instead filed their return reporting the award as taxable gain; the later purchase of a printing company did not cure the lack of a timely election, and the court sustained the Commissioner’s deficiency determination.


Santucci v. Commissioner, T.C. Memo. 1973-178 (1973)