26 CFR 1.1015-3: Gifts or transfer in trust

before January 1, 1921.

Whether that porton of property in the investment accounts of a railroad or public utility company which is attributable to expenditures by a state or other governmental body is a "gift". See Rev. Rul. 68-470, page 101.

An owner-lessor of land who assumes a mortgage on land improvements upon default by the lessee and thereby acquires title to the improvements must apportion the amount of the assumed mortgage between the improvements and the land for purposes of determining basis.

SECTION 1016.-ADJUSTMENTS TO BASIS

26 CFR 1.1016-1: Adjustments to basis; scope of section.

(Also Section 1012; 1.1012-1.)

Rev. Rul. 68-362

Advice has been requested as to the basis of certain property under the circumstances described below.

The taxpayer leased land that it owned to X. Under the terms of the lease, I was obligated to construct a shopping center on the land. The construction funds were borrowed by X from an insurance company. X executed a mortgage on the shopping center improvements in favor of the insurance company to secure the loan. In addition, the taxpayer subordinated its fee interest in the land to the mortgage.

Subsequently, I defaulted on the loan. The insurance company advised the taxpayer that it would foreclose on the mortgage unless the delinquent mortgage payments were made. The unpaid balance on the mortgage exceeded the fair market value of the shopping center improvements. However, the combined fair market value of the land and improvements exceeded the unpaid balance of the mortgage. In order to protect its interest in the property, the taxpayer assumed the mortgage on the property, made the delinquent payments, and acquired legal title to the shopping center improvements.

The assumption of a mortgage, or taking property subject to a mortgage, in connection with the acquisition of property to which the mortgage relates, is treated for purposes of determining the basis of such property as though the purchaser had paid cash in the amount of the mortgage. See Beulah B. Crane v. Commissioner, 331 U.S. 1 (1947), Ct. D. 1684, C.B. 1947-1, 97, and section 1.1038-1 (c) (4) (ii) of the Income Tax Regulations.

Amounts expended to perfect title to real property are capital expenditures that are reflected in the basis of such real property. See section 1.263 (a)-2(c) of the regulations.

In the instant case, the assumption of the mortgage resulted in the taxpayer both protecting its title to the land and acquiring legal title to the shopping center improvements. Therefore, the basis of the land must be adjusted under section 1016 of the Internal Revenue Code of 1954 to reflect the cost (represented by a portion of the mortgage assumed) of protecting the taxpayer's title to the land.

Accordingly, for purposes of section 1012 of the Code, the basis of the shopping center improvements is an amount equal to that portion of the amount of the mortgage assumed that represents the cost of acquiring the improvements, that is, the fair market value of the improvements. The excess of the amount of the mortgage assumed over the fair market value of the shopping center improvements is added to the basis of the land under section 1016 of the Code.

Treatment of amounts received by a public utility in settlement of an antitrust action brought under section 4 of the Clayton Act where a portion of the cost of the asset involved has been fully amortized.

26 CFR 1.1016-1: Adjustments to basic; scope of section.

(Also Section 61; 1.61-1.)

Rev. Rul. 68-378

A suit was filed by a regulated public utility taxpayer, under section 4 of the Clayton Act, 15 U.S.C. 15, for damages sustained in having been charged higher prices for a particular asset used in its business than it would have had to pay in the absence of a price fixing conspiracy. The suit was compromised and settled, prior to verdict or judgment, for an amount aggregating less than the amount of the actual damages claimed. Sixty percent of the cost of the asset was subject to amortization as an emergency facility under section 168 of the Internal Revenue Code of 1954 and the remainder of the cost, 40 percent, was subject to depreciation under section 167 of the Code. At the time of settlement, that portion of the cost of the asset subject to amortization had been fully amortized. The taxpayer elected to treat the amount of the settlement under the provisions of section 4.02 of Revenue Procedure 67-33, C.B. 1967–2, 659.

Held, the taxpayer corporation must apply the total amount of the settlement to reduce the amount of any remaining adjusted basis of the asset. If the amount of the settlement relates to an asset for which depreciation has been computed and accounted for through multiple asset or composite accounting, the taxpayer may not reduce the adjusted basis of any other asset in such account by the amount so received but instead must apply such amount to reduce the adjusted basis of the asset that was the subject of the antitrust suit and to which the settlement is attributable. If the amount received exceeds the adjusted basis of the asset involved, the excess must be included as ordinary income under section 61 of the Code for the taxable year of receipt or accrual.

26 CFR 1.1016-3: Exhaustion, wear and tear, obsolescence, amortization, and depletion for periods since February 28, 1913.

Whether depreciation reserves may be transferred from one account to another. See Rev. Rul. 68-617, page 93.

PART III.-COMMON NONTAXABLE EXCHANGES

The exchange of a ranch in the United States for a ranch in a foreign country, both of which were held for productive use in the taxpayer's trade or business, comes within the purview of section 1031(a) of the Code.

SECTION 1031.-EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT

26 CFR 1.1031(a)-1: Property held for productive use in trade or business or for investment.

Rev. Rul. 68-363

Advice has been requested whether a taxpayer may, under the circumstances described below, avail himself of the nonrecognition of gain provisions of section 1031 of the Internal Revenue Code of 1954.

The taxpayer, a citizen of the United States, exchanged a ranch in the United States for a ranch in a foreign country and $250,000 in cash. Both ranches were held by the taxpayer for productive use in his trade or business. He realized a gain of $300,000 on the exchange.

Section 1031 (a) of the Code provides, in part, for nonrecognition of gain or loss if property held for productive use in trade or business is exchanged solely for property of a like kind to be held for productive use in trade or business. Section 1031 (b) of the Code provides, in part, that if an exchange would be within the provisions of subsection (a) but other property or money is received, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. Section 1031 of the Code imposes no qualification as to the place where either the property transferred or the property received in the exchange is located, and no such qualification can be inferred. The location of either property is deemed immaterial in determining the applicability of such section to an exchange.

Accordingly, the exchange of the ranches in this case comes within the purview of section 1031 (a) of the Code. However, under section 1031(b) of the Code, the gain realized on the exchange is recognized to the extent of $250,000, the amount of the cash received.

See Revenue Ruling 54-611, C.B. 1954-2, 159, which similarly holds that the sale of an old residence in the United States and the purchase of a new residence in a foreign country by a citizen of the United States comes within the purview of section 112(n) of the Internal Revenue Code of 1939 (now section 1034 of the 1954 Code), relating to the nonrecognition of gain from the sale or exchange of a residence.

26 CFR 1.1031(a)-1: Property held for pro

ductive use in trade or business or for

investment.

Whether the purchase of a leasehold interest of 45 years on property owned by the taxpayer represents a purchase of property of like kind. See Rev. Rul. 68-394, page 338.

Replacement of involuntarily converted property by a corporation under a financing arrangement with a municipality qualifies as a purchase of replacement property under section 1033 of the Code.

SECTION 1033.-INVOLUNTARY CONVERSIONS

26 CFR 1.1033 (a)-2: Involuntary conversion where disposition of the converted property occurred after December 31, 1950.

Rev. Rul. 68-642

Advice has been requested whether property acquired in the manner described herein is a purchase of replacement property for purposes of the nonrecognition of gain provisions of section 1033 of the Internal Revenue Code of 1954.

A corporation sold its manufacturing plant and the land upon which it was situated to a municipality under threat of condemnation and had a realized gain. For purposes of replacing the property sold, the corporation purchased a tract of unimproved land and immediately conveyed this land to the municipality which assumed the payment of the purchase price thereof. The municipality then constructed on this land a manufacturing plant to the specifications of the corporation.

The municipality financed the purchase of the land and construction of the building through the issuance of industrial revenue bonds. The building was completed before the end of the period within which property must be replaced as provided in section 1033 (a) (3) (B) of the Code. The corporation then "leased" the land and building for a 20-year period, paying "rent" equal to the principal and interest on the municipality's bonds. At the end of the "lease," the corporation is obligated to purchase the land and building for a nominal price. Under the provisions of the "lease," the burdens and benefits of ownership fall upon the corporation.

Section 1033 (a) (3) (A) of the Code provides, in part, that where property is sold under threat or imminence of condemnation, and the taxpayer purchases, within the specified replacement period, other property similar or related in service or use, the taxpayer may elect to have the gain realized upon the condemnation recognized only to the extent that the amount realized exceeds the cost of the replacement property.

The above transaction is considered, for Federal income tax purposes, a purchase by the corporation of the land and building with financing being provided through the municipality.

Accordingly, the transaction qualifies as a purchase of replacement property by the corporation for purposes of section 1033 of the Code.

26 CFR 1.1033 (c)-1: Basis of property ac

quired as a result of an involuntary con

version.

Computations, for purposes of section 46(c)(1) of the Code, of basis (or cost) of section 38 property placed in service to replace property that was destroyed by fire where the taxpayer elects not to recognize gain realized on the involuntary conversion under section. 1033 (a) (3) of the Code. See Rev. Rul. 68–356, page 17.

The purchase of a leasehold of 30 or more years on property already owned by a taxpayer, immediately following the condemnation of unimproved real estate, qualifies as a "like kind" replacement of property for purposes of section 1033(g) of the Code.

26 CFR 1.1033 (g)-1: Condemnation of real property held for productive use in trade or business or for investment.

(Also Section 1031; 1.1031 (a)-1.)

Rev. Rul. 68-394

Advice has been requested whether the investment of condemnation proceeds, under the circumstances set forth below, will qualify as replacement of involuntary converted property for purposes of section 1033 of the Internal Revenue Code of 1954.

In 1965, land held by the taxpayer for investment was condemned for a state freeway. The taxpayer owned adjacent land that he had leased to a second party to use and develop as a mobile trailer park site. For purposes of replacing the condemned property, the taxpayer used part of the condemnation proceeds to acquire by purchase the outstanding leasehold on the adjacent property. The lease still had 45 years to run at the time of purchase. After acquisition of the leasehold, the taxpayer used the land as a mobile trailer park site. His purchase of the outstanding leasehold was an arm's-length transaction.

Section 1033 (a) of the Code provides that if property is compulsorily or involuntarily converted into money, the gain shall be recog nized except, if the taxpayer so elects, to the extent that the taxpayer, during a specified period, for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted. If qualified replacement property is purchased, gain shall be recognized only to the extent that the amount realized upon such conversion exceeds the cost of such replacement property.

Section 1033 (g) of the Code provides that if real property not held primarily for sale, but held for productive use in trade or business or for investment, is compulsorily or involuntarily converted (as the result of its seizure, requisition, or condemnation, or threat or imminence thereof), property of a like kind to be held either for productive use in trade or business or for investment shall be treated as property similar or related in service or use to the property so converted. Section 1.1033 (g)-1 (a) of the Income Tax Regulations refers to section 1.1031(a)-1 of the regulations for guidance in determining whether the replacement property is property of like kind. Section 1031 (a) of the Code reads as follows:

No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

Section 1.1031 (a)-1 of the regulations defines the words "like kind" as having reference to the nature or character of property and not to its grade or quality. It further provides, in part, as follows: