Category: Nontaxable Exchanges
Subject: Involuntary Conversions
Title: Use of Insurance Proceeds
IRC Sections: 1033
Filename: 1290.html
Date Produced: 12/95 Copyright 1998, The Tax Resource Group. All rights reserved. Telephone
800-578-3498. Internet: www.taxresourcegroup.com Background
Taxpayer (TP) owns a building damaged in the 1994 Northridge earthquake.
TP received a total of $360,000 in insurance proceeds and claimed a casualty
loss of $533,000. Some of the insurance proceeds were not reinvested in
the property. Issue
To what extent, if any, do the unreinvested insurance proceeds result in
taxable income? Answer
If the insurance proceeds received exceed the adjusted basis of the portion
of the property sold, gain results to the extent such proceeds are not reinvested
either in repairing the property or in property similar in service and use. Discussion
If Section 1033 (the involuntary conversion rules) apply to the facts set
forth above, any gain realized from the partial conversion of the property
into money will be recognized to the extent such funds are not reinvested
into the property or property similar in service and use. Section 1033(a) provides in pertinent part as follows. If property (as a result of its destruction in whole or in part,
theft, seizure, or requisition or condemnation or threat or imminence thereof)
is compulsorily or involuntarily converted-- [Emphasis added.]
Regulation Section 1.1033(a)-1 provides in pertinent part as follows. Section 1033 applies to cases where property is compulsorily or involuntarily
converted. An "involuntary conversion" may be the result of
the destruction of property in whole or in part, the theft of property,
the seizure of property, the requisition or condemnation of property, or
the threat or imminence of requisition or condemnation of property. [Emphasis
added.] It is clear from the foregoing that Section 1033 applies to a partial
destruction of property. | 
