[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1033(b)-1]

[Page 124-125]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1033(b)-1  Basis of property acquired as a result of an involuntary 
conversion.

    (a) The provisions of the first sentence of section 1033(b) may be 
illustrated by the following example:


[[Page 125]]


    Example: A's vessel which has an adjusted basis of $100,000 is 
destroyed in 1950 and A receives in 1951 insurance in the amount of 
$200,000. If A invests $150,000 in a new vessel, taxable gain to the 
extent of $50,000 would be recognized. The basis of the new vessel is 
$100,000; that is, the adjusted basis of the old vessel ($100,000) minus 
the money received by the taxpayer which was not expended in the 
acquisition of the new vessel ($50,000) plus the amount of gain 
recognized upon the conversion ($50,000). If any amount in excess of the 
proceeds of the conversion is expended in the acquisition of the new 
property, such amount may be added to the basis otherwise determined.

    (b) The provisions of the last sentence of section 1033(b) may be 
illustrated by the following example:

    Example: A taxpayer realizes $22,000 from the involuntary conversion 
of his barn in 1955; the adjusted basis of the barn to him was $10,000, 
and he spent in the same year $20,000 for a new barn which resulted in 
the nonrecognition of $10,000 of the $12,000 gain on the conversion. The 
basis of the new barn to the taxpayer would be $10,000--the cost of the 
new barn ($20,000) less the amount of the gain not recognized on the 
conversion ($10,000). The basis of the new barn would not be a 
substituted basis in the hands of the taxpayer within the meaning of 
section 1016(b)(2). If the replacement of the converted barn had been 
made by the purchase of two smaller barns which, together, were similar 
or related in service or use to the converted barn and which cost $8,000 
and $12,000, respectively, then the basis of the two barns would be 
$4,000 and $6,000, respectively, the total basis of the purchased 
property ($10,000) allocated in proportion to their respective costs 
(8,000/ 20,000 of $10,000 or $4,000; and 12,000/20,000 of $10,000, or 
$6,000).

[T.D. 6500, 25 FR 11910, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960. 
Redesignated and amended by T.D. 7625, 44 FR 31013, May 30, 1979]