IRS written determination 201609003

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201609003
Release Date: 2/26/2016
Index Number: 1033.01-00, 1033.02-00,
1033.03-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:ITA:B04
PLR-118033-15
Date:
November 24, 2015
LEGEND
Taxpayer=----------------------------------------------------------------
Corp=------------------------------------------------------------------
Agency=-----------------------------------
UNR=----------------------
V=------------------------------------
W=------------------------------
X=---------------------
Y=---------------------
Z=----------------------------------------------------------
Year 1=-------
Year 2=-------
Year 3=-------
Date 1=---------------------------
Date 2=----------------------
Date 3=--------------
Date 4=-------------------
a=---------------
b=------------------
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PLR-118033-15
2
Dear ---------------:
This responds to your request for a private letter ruling, dated May 27, 2015, regarding
the application of §1033 of the Internal RevenueCode to your transaction. Specifically,
you request a ruling that there was a condemnation or requisition of property under §
1033 and that the proposed replacement property, whether acquired by purchase or
construction, is similar or related in service or use to the property converted.
FACTS
History of Legal Relationship between Taxpayer and Agency
Taxpayer is the parent of an affiliated group that files a consolidated federal income tax
return on the basis of a calendar taxable year. One member of the affiliated group is
Corp, a wholly-owned subsidiary of Taxpayer. Corp, either directly or throughwholly-
owned LLCs that are disregarded entities for federal income tax purposes, operates
facilities at X pursuant to contracts with Agency. Corp and its predecessors have been
Y at Z since Year 1. Corp has not only operated facilities at Z, it has also, at its own
expense, built or bought many buildings and other improvements at Z.
The nature of Corp’s property interest in the buildings and other improvements it
constructed or purchased at Z is unique.
1
Beginning in Year 1, Agency has contracted
with private parties to operate and develop public accommodation facilities at X.
Agency never has had the funds available to build the public accommodation facilities
needed in X. Therefore, it has adopted policies designed to encourage private parties
to make the substantial investments required to build such facilities. These policies
could not provide private parties with legal title to the facilities because, by law, Agency
holds and retains title to all facilities built on Agency land.
As Agency could not provide legal title to Corp, Agency provided standard provisions in
its contracts that recognized Corp’s rights in the facilities constructed or purchased
including the right to receive just compensation for the facilities if Agency took the
facilitiesor granted a third party the privilege to operate those facilities. Effectively, the
contracts placed Corp in the same position as one holding formal title to the facilities
when condemned by a government entity.
In Year 2, after concerns were expressedabout the contractual rights of the parties,
Congress passed legislation codifying the existing Agency policy and providing Corp
with a statutory property right in the facilities built on Agency land. Essentially, the
statutory right is a beneficial ownership interest (BOI) that could not be taken for public

1
To our knowledge, this type of property interest is not used by any other state or federal agency or by
private industry.

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3
use without just compensation. However, the BOI does not include any interest in the
land on which the related capital improvements are situated.
In Year 3, additional Congressional hearings were held concerning Agency policy that
culminated in the passage of very similar legislation. The legislation, which is currently
in effect, preserved the long-standing policy of Agency that was codified in Year 2 that
gave Corp a BOI in the facilities built onAgency land. It granted the right to just
compensation if the improvements are taken by Agency or if Agency bestows the
privilege to operate these improvements (facilities) to a third party. Additional statutory
provisions provide that a current BOI: (i) shall not be extinguished by the expiration or
termination of the underlying contract, and (ii) may be pledged as security for financing
of a capital improvement or the acquisition of a contract with Agency.
The beneficial ownership rights of Corp are created by statute and exist outside of the
contract with Agency. In this regard, for both financial reporting and tax purposes, Corp
has consistently treated itself as the owner of the improvements at Z and has
depreciated those improvements over their appropriate federal tax lives.
The Transaction
On Date 1, prior to the expiration of its current contract with Corp, Agency “bought
down”
2
approximately a percent of Corp’s BOI in Z, paying Corp $ b. On Date 2,
pursuant to the award of a new contract by Agency to an unrelated third party, UNR,
Corp received a payment of approximately $ d from UNRfor approximately c percent of
Corp’s BOI in Z. The amounts paid to Corp were determined pursuant to methodology
established by the underlying statute.
Taxpayer represents that Corp vigorously resisted the buy down and the award of a
new contract to UNR, and had no choice but to accept the implementation of the
statutory provisions.
On Date 3, Agency awarded a new contract to Corp to operate as Y at V. Corp has
commenced several construction projects at V that are expected to increase Corp’s
statutory BOI at V to approximately $ e. Additionally, on Date 4, Agency awarded a new
contract to Corp to operate as Y at W, which required Corp to purchase existing
buildings and improvements at Wthat are expected to increase Corp’s BOI at Wto
approximately $ f.
The old BOI at Z and the new BOI at V and Wrelate to buildings that were or are used
by Corp in its business of operating as Y for X. The vast majority of these buildings are
accommodations, retail shops, administrative buildings, and other support buildings, all
of which are essential to the business of operating as Y for X. In its submissions for this

2
A “buy down” is a term coined by Agency. In a buy down, Agency forcibly purchases or takes a portion
of the private parties BOI.

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ruling, Taxpayer attached several exhibits showing the composition of the replacement
BOI at Wand a projected list of the buildings and values that are expected to compose
the replacement BOI at V.
LAW AND ANALYSIS
Section 1033(a)(2) of the Code provides, in part, that 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 into money and if the
taxpayer during the period specified in § 1033(a)(2)(B), for the purpose of replacing the
property so converted, purchases other property similar or related in service or use to
the property so converted, then, at the election of the taxpayer, the gain shall be
recognized only to the extent that the amount realized upon such conversion exceeds
the cost of such property.
Ruling Request 1
One of the circumstances in which a § 1033 requisition or condemnation occurs is
where a taxpayer's property is subjected to a compensable governmental taking for
public use under the Fifth Amendment ofthe U.S. Constitution. American Natural Gas
Co. v. United States, 279 F.2d 220 (Ct. Cl. 1960); Behr-Manning Corp. v. United States,
196 F. Supp. 129 (D.C. Mass. 1961); Rev. Rul. 69-254, 1969-2 C.B. 162; Rev. Rul. 58-
11, 1958-1 C.B. 273. The Fifth Amendment provides, in part, that no “private property
be taken for public use without just compensation.”
Property within the meaning of §1033
In the present situation, Corp does not hold title to the buildings and other
improvements that it constructed on Agency land. However, Corp does have a statutory
right or BOI in the facilities. The legislation enacted in Year 2 and Year 3 clearly
indicates that Congress intended to provide Corp with the same protections provided by
the Fifth Amendment. The language of the statute and underlying contract shows that
Congress and Agency intended to effectively place Corp in the same position it would
be in if it held title to the improvements. Also, the language of the statute closely
parallels that of the Fifth Amendment. This unique statutory scheme is also evidence
that Congress intended to treat Corp’s BOI as a protected property interest, which
constitutes property within the meaning of § 1033.
Taking within the meaning of § 1033
The meaning of condemnation or requisition for purposes of § 1033 of the Code is not
strictly limited to takings within the meaning of the Fifth Amendment.

PLR-118033-15
5
In Rev. Rul. 82-147, 1982-1 C.B. 190, a federal law prohibited the use of motor boats
with motors of greater than 25 horsepower on designated lakes in wilderness areas. It
also provided that, if the horsepower restriction made the operation of the resort
uneconomical, the owner of the resort could require the government to purchase its
resort at its fair market value (determined without regard to the horsepower restrictions).
The horsepower restriction made the operation of the taxpayer’s resort uneconomical
and the taxpayer sold its fishing lodge to the federal government.
In holding that the government’s purchase of the resort constituted a condemnation
within the meaning of § 1033, the Service did not refer to a Fifth Amendment taking, but
instead emphasized that the horsepower restriction “in addition to the provision
authorizing purchase of a resort at its fair market value without regard to the restriction,
effectively constitutes a taking of property upon payment of fair compensation.”
In this case, the Year 2 and Year 3 legislation provides, in language similar to the Fifth
Amendment, that Corp’s BOI shall “not be taken for public use except on payment of
just compensation.” This language clearly suggests that Congress understood that
Agency would have the power to take Corp’s BOI for public use. Although this taking is
not necessarily a taking under the Fifth Amendment, it is deemed to be (or equivalent
to) a taking that qualifies as an involuntary conversion under §1033. In regards to Year
2 and Year 3 legislation, concluding that Corp is ineligible for relief under §1033 would
be inconsistent with the Congressional intent to provide Y with the same rights they
would have had if they held title to the land and improvements in the X.
The situations and holdings presented in the following two revenue rulings are
sufficiently analogous to support this conclusion:
In Rev. Rul. 57-261, 1957-1 C.B. 262, a property owner entered into a contract with a
city under the threat of condemnation, and the contract gave the city the option to
purchase the property. The contract provided that the city would lease the property for
threeyears and that the city had the option to purchase the land and improvements at
stipulated prices. The city subsequently exercised its option under the contract and
purchased the land and improvements at the prices stated in the contract. The Internal
Revenue Service concluded that the “... the execution of a lease and the exercise of an
option contained therein to purchase the property and the improvements thereon is a
sale under the threat or imminence of condemnation.” The Service also concluded that
any gain from the sale of the property was eligible for the relief provisions of § 1033(a).
In the case at hand, Corp executed a contract (that incorporates the underlying statute)
with Agency that recognizes Corp’s right to just compensation upon the taking of its
BOI. The execution of the contract recognizing the BOI and establishing a method for
valuing it does not transform the taking into a contractual option to purchase.

PLR-118033-15
6
Also, Rev. Rul. 81-181, 1981-2 C.B. 162, is consistent with this result. In that ruling, the
taxpayer read in a newspaper that a city intended to acquire certain land that was
owned by A through condemnation. The taxpayer purchased the property from A
knowing that it would eventually be condemned. When the city subsequently
approached the taxpayer regarding acquisition of the property, the taxpayer sold it to
the city at a gain. The revenue ruling concluded that the fact that the taxpayer knew
when he purchased the property that it would eventually be condemned did not
disqualify the taxpayer from relief under § 1033.
In the present case, although Corp knew upon executing the contract with Agency that
its BOI could be taken on the payment of just compensation, Corp is eligible for relief
under § 1033. Corp merely entered into a contract with Agency that recognizes its
rights as equivalent to property rights under the Fifth Amendment.
Ruling Request 2
Conversion into Property Similar or Related in Service or Use

With respect to owner-users of converted property, replacement property will be
considered to be similar or related in service or use to the converted property if the
“physical characteristics and end uses of the converted and replacement properties are
closely similar.” Rev. Rul. 64-237, 1964 C.B. 319. In Maloof v. Commissioner, 65 T.C.
263, 269 (1975), the Tax Court explains the similar or related in service or use
requirement as follows:
[T]he reinvestment must be made in substantially similar business property.
Ellis D. Wheeler, 58 T.C. 459, 463 (1965). Stated differently, the statute
requires a “reasonably similar continuation of the petitioner's prior commitment
of capital and not a departure from it.” Harvey J. Johnson v. Commissioner,
43 T.C. 736, 741 (1965). While it is not necessary to acquire property which
duplicates exactly that which was converted (Loco Realty Co. v. Com'r, 306
F.2d 207 (8th Cir. 1962), rev'g 35 T.C. 1059 (1961)), the fortuitous
circumstance of involuntary conversion doesnot permit a taxpayer to change
the character of his investment without tax consequences. (See Liant Record,
Inc. v. Com'r, 303 F.2d 326 (2d Cir. 1962), rev'g 36 T.C. 224 (1961)).
Section 1033 is a Relief Provision
In determining whether a given taxpayer's receipt of replacement property qualifies
under § 1033, courts have long recognized that § 1033 is a relief provision that should
be liberally construed to effect its purpose. E.g., Massillon-Cleveland-Akron Sign Co. v.
Commissioner, 15 T.C. 79, 83 (1950) (interpreting former § 112(f), the precursor to §
1033). Section 1033 provides a means by which a taxpayer whose enjoyment of his
property is interrupted without his consent may arrange to have that interruption ignored

PLR-118033-15
7
for tax purposes, by returning as closely as possible to his original position. Maloofat
270, citing Gaynor News Co. v. Commissioner, 22 T.C. 1172 (1954). What is required
is a reasonable degree of continuity in the nature of the assets as well as in the general
character of the business. Id. Thus, if the replacement property continues the nature
and character of the taxpayer's investment in, or use of, the converted property, it
qualifies as replacement property for purposes of § 1033 and gain is deferred.
The old BOI at Z and the new BOI at V and Wrelate to buildings that were or are used
by Corp in its business of operating as Y for X. The vast majority of these buildings are
accommodations, retail shops, administrative buildings, and other support buildings, all
of which are an essential part of the business of operating as Y for X. Over g percent of
the BOI that was taken on Date 1 and Date 2 was in buildings providing
accommodations. According to current estimates and projections, over h of the new
BOI will be in buildings providing such accommodations.
As stated in Maloof, it is not necessary to duplicate exactly what was converted. The
key is whether there is a reasonable degree of continuity in the nature of the assets as
well as in the general character of the business.
In this case, there is a reasonable degree of continuity in the nature of the assets and
the general character of the business. All of the assets are buildings used in the
business of operating facilities for X, approximately g percent of which consists of
accommodations for X. The general character of Corp’s business at V and Wis the
same as at Z.
CONCLUSIONS
1. There was a condemnation or a requisition of property within the meaning of § 1033
of the Code on Date 1, when Agency acquired a portion of Corp’s BOI in the facilities
Corp constructed or purchase at Z and, on Date 2, when UNR, at the direction of
Agency, acquired another portion of Corp’s BOI.
2. The BOI related to facilities in other X operated by Corp (whetheracquired by
purchase as in the case of Wor by construction of additional facilities as in the case of
V) constitutes (or will constitute) “other property similar or related in service or use to the
property so converted” within the meaning of § 1033(a)(2)(A) of the Code.
3

CAVEATS
Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

3
Following the submission of its original ruling request, Agency awarded Corp a new Y contact for a
stated number of years for a portion of Z that may require Corp to invest in additional BOI in Z.

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This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. In accordance with the Power of
Attorney on file with this office, a copy of this letter is being sent to your authorized
representatives.
A copyof this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.
The rulings contained in this letter are based upon information and representations
submitted by the Taxpayer and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.
Sincerely,
J. Peter Baumgarten
Assistant to the Branch Chief, Branch 4
Office of Chief Counsel
(Income Tax & Accounting)