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Tax Treatment of the sale of utility rights of way and easements.
Question:  Telephone company paid owner $13,000 for right of way and easement through land held for development.   What is the allocation of  basis to such a sale?
Answer: The Cost Basis of the original land is reduced by sales price of the easement.  If the basis is less than sales price of easement, the owner has a Schedule D gain on the difference.  If not, there is no gain on sale of easement.  

Legal Explanation:
The taking of an easement by condemnation across property of a taxpayer that renders the taxpayer's manufacturing plant inoperable constitutes an
involuntary conversion. Rev. Rul.60-69,1960-1 C.B. 294. For example, the sale of a scenic easement under the threat of condemnation "that restricted the taxpayer's use of the property" constituted an involuntary conversion even though the taxpayer retained legal title to the property and could continue to use the property under the restrictions. In conveying the easement, the taxpayer gave up a beneficial use of the property and thereby disposed of a real property interest. Rev.Rul. 76-69,1976-1 C.B. 219.

On the other hand, the mere fact the taxpayer's property is sold pursuant to a condemnation proceeding does not result, in and of itself, in involuntary conversion treatment. For example, the IRS has denied involuntary conversion treatment to a developer who consented to the condemnation and sale of a portion of property as a condition to receiving zoning approval for development of another parcel of land. Even though the property was disposed of in a condemnation proceeding, the IRS determined that it was not an involuntary conversion. Rev. Rul.69-654,1969-2 C.B. 62.

Property does not have to be actually taken under condemnation for there to be an involuntary conversion. The sale by the property owner under the threat of an imminent condemnation will also constitute an involuntary conversion sufficient to defer the recognition of gain. The mere discussion of the possibility of a condemnation, however, will not constitute such a threat. Generally, for there to be a threat or imminence of requisition or condemnation, two elements must exist. First, the property owner must be informed, either orally or in writing, by a representative of a governmental agency that is authorized to acquire the property for public
use, that a decision has been reached to so acquire the property. It is sufficient if the information is obtained as the result of a newspaper article or other news report as long as the property owner confirms the correctness of the published report from the appropriate government official. Second, the property owner must have reasonable grounds to believe that the necessary steps to condemn the property will be instituted if a voluntary sale is not arranged. Rev. Rul.63-221,
1963-2 C.B. 332.

Even if the condemning authority does not actually have, either prior to or at the time of the sale, the authority to condemn property for public use, a threat or imminence may exist if the named condemning authority can readily obtain the necessary authority if a voluntary sale is not arranged. Rev. Rul.
74-8, 1974-1 C.B. 200.

The General Rule: If property is compulsorily or involuntarily converted, the gain is not recognized as a result of the conversion to the extent that the converted property is replaced with property that is similar or related in service or use. Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email:

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