[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: 26CFR1.1332-1]

[Page 649-652]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1332-1  Inclusion in gross income of war loss recoveries.

    (a) Amount of recovery. Except as provided in section 1333(1), the 
amount of the recovery in respect of a war loss in a previous taxable 
year is determined in the same manner for the purpose of either section 
1332 or 1333. The amount of the recovery of any money or property in 
respect of any war loss is the aggregate of the amount of such money and 
of the fair market value of such property, both determined as of the 
date of the recovery. But see paragraph (a) of Sec. 1.1333-1 for 
optional valuation where the taxpayer recovers the same war loss 
property.
    (b) Amount of gain includible. (1) A taxpayer who has sustained a 
war loss described in section 127(a) of the Internal Revenue Code of 
1939 and who has not elected to have the provisions of section 1333 
apply to any taxable year in which he recovered any money or property in 
respect of a war loss in any previous taxable year must include in his 
gross income for each taxable year, to the extent provided in section 
1332, the amount of his recoveries of money and property for such 
taxable year in respect of any war loss in a previous taxable year. 
Section 1332 provides that such recoveries for any taxable year are not 
includible in income until the taxpayer has recovered an amount equal to 
his allowable deductions in prior taxable years on account of such war 
losses which did not result in a reduction of any tax under chapter 1 or 
2

[[Page 650]]

of the Internal Revenue Code of 1939. War loss recoveries are considered 
as made first on account of war losses allowable but not actually 
allowed as a deduction, and second on account of war losses allowed as a 
deduction but which did not result in a reduction of tax under chapter 1 
or 2 of the Internal Revenue Code of 1939. If there were deductions 
allowed on account of war losses for two or more taxable years which did 
not result in a reduction of any tax under chapter 1 or 2 of the 
Internal Revenue Code of 1939, a recovery on account of such losses is 
considered as made on account of such losses in the order of the taxable 
years for which they were allowed beginning with the latest. See Sec. 
1.1337-1 for the determination of the amount of such deductions. 
Recoveries in excess of such amount are treated as ordinary income until 
such excess equals the amount of the taxpayer's allowable deductions in 
prior taxable years on account of war losses which did result in a 
reduction of any such tax under chapter 1 or 2 of the Internal Revenue 
Code of 1939. Any further recoveries in excess of all the taxpayer's 
allowable deductions in prior taxable years for war losses are treated 
as gain on an involuntary conversion of property as a result of its 
destruction or seizure, and such gain is recognized or not recognized 
under the provisions of section 1033. See section 1033 and the 
regulations thereunder. Such gain, if recognized, is included in gross 
income as ordinary income unless section 1231(a) applies to cause such 
gain to be treated as gain from the sale or exchange of a capital asset 
held for more than six months. See section 1231(a) and the regulations 
thereunder.
    (2) The determination as to whether and to what extent any 
recoveries are to be included in gross income is made upon the basis of 
the amount of all the recoveries for each day upon which there are any 
such recoveries, as follows:
    (i) The amount of the recoveries for any day is not included in 
gross income, and is not considered gain on an involuntary conversion, 
to the extent, if any, that the aggregate of the allowable deductions in 
prior taxable years on account of war losses which did not result in a 
reduction of any tax of the taxpayer under chapter 1 or 2 of the 
Internal Revenue Code of 1939, as determined under Sec. 1.1337-1, 
exceeds the amount of all previous recoveries in the same and prior 
taxable years.
    (ii) The amount of the recoveries for any day which is not excluded 
from gross income under subdivision (i) of this subparagraph is included 
in gross income as ordinary income, and is not considered gain on an 
involuntary conversion, to the extent, if any, that the aggregate of all 
the allowable deductions in prior taxable years on account of war losses 
(both those which resulted in a reduction of a tax of the taxpayer and 
those which did not) exceeds the sum of the amount of all previous 
recoveries in the same and prior taxable years and of that portion, if 
any, of the amount of the recoveries for such day which is not included 
in gross income under subdivision (i) of this subparagraph.
    (iii) The amount of the recoveries for any day which is not excluded 
from gross income under subdivision (i) of this subparagraph and is not 
included in gross income as ordinary income under subdivision (ii) of 
this subparagraph is considered gain on an involuntary conversion of 
property as a result of its destruction or seizure. The following 
provisions then apply to this gain:
    (a) Such gain is recognized or not recognized under the provisions 
of section 1033, relating to gain on the involuntary conversion of 
property. For the purpose of applying section 1033, such gain for any 
day is deemed to be expended in the manner provided in section 1033 to 
the extent the recovery for such day is so expended.
    (b) If such gain is recognized, it is included in gross income as 
ordinary income or, if the provisions of section 1231(a) apply and 
require such treatment, as gain on the sale or exchange of a capital 
asset held for more than six months. For the purpose of applying section 
1231(a), such recognized gain for any day is deemed to be derived from 
property described in that section to the extent of the recovery for 
such day with respect to such property, except such portion of such 
recovery as is attributable to the nonrecognized gain for such day.

[[Page 651]]

    (c) Section 1336 provides that in determining the unadjusted basis 
of recovered property, the total gain and the recognized gain with 
respect to such property must be determined. For such purpose, the 
recognized gain deemed to be derived from properties described in 
section 1231(a) may be allocated among such properties in the proportion 
of the recoveries with respect to such properties, reduced for each 
property by the portion of the recovery attributable to the 
nonrecognized gain for such day, and the recoveries with respect to 
properties not described in section 1231(a) may be similarly allocated. 
The total gain derived from any recovered property is the sum of the 
nonrecognized gain attributable to the recovery of such property and of 
the recognized gain allocable to such property.
    (3) The foregoing provisions may be illustrated by the following 
examples:

    Example 1. The taxpayer sustained war losses of $3,000 on account of 
properties A, B, C, and D. Of this amount, $1,000 did not result in a 
reduction of any income tax of the taxpayer, as determined under the 
provisions of Sec. 1.1337-1. In a subsequent taxable year, he received 
an award of $800 from the Government on account of property A. This is 
not included in income since it is less than the amount by which his 
allowable deductions for prior taxable years on account of war losses 
which did not result in any tax benefit ($1,000) exceed $0, the sum of 
all his previous recoveries. On a later date the taxpayer recovers 
property B, which is worth $1,500 on the date of recovery. This recovery 
is not included in gross income to the extent of $200, the amount by 
which the aggregate of the allowable deductions for prior taxable years 
on account of war losses which did not result in any tax benefit 
($1,000) exceeds the sum of all previous recoveries ($800). The 
remaining $1,300 of the recovery is included in gross income as ordinary 
income, and is not considered gain on the involuntary conversion of 
property, since it is less than the amount by which the aggregate of all 
the allowable deductions in prior taxable years on account of war losses 
($3,000) exceeds $1,000, the sum of the $800 of previous recoveries and 
of the $200 portion of the recovery with respect to B which is not 
included in gross income. On a still later date the taxpayer sells for 
$2,500 his rights to recover C. Since the allowable deductions for prior 
taxable years on account of war losses which did not result in any tax 
benefit ($1,000) do not exceed the previous recoveries by the taxpayer 
($800 and $1,500, or $2,300), none of the recovery on account of C is 
excluded from gross income. This recovery is included in gross income as 
ordinary income, and is not considered gain on the involuntary 
conversion of property, to the extent of $700, the amount by which the 
aggregate of all the allowable deductions for prior taxable years on 
account of war losses ($3,000) exceeds $2,300, the sum of the $2,300 of 
previous recoveries and of the $0 portion of the recovery on account of 
C which is not included in gross income. The remaining $1,800 of the 
recovery is considered gain on an involuntary conversion of property on 
account of its destruction or seizure, and is not recognized if 
forthwith expended in the manner provided in section 1033. Thus, it is 
not recognized if it is forthwith expended for the acquisition of 
property related in service or use to C. On a later date the taxpayer 
recovers D, which has a fair market value of $400 at the time of the 
recovery. Since the aggregate of all the allowable deductions for prior 
taxable years on account of war losses ($3,000) does not exceed the 
previous recoveries by the taxpayer ($800+$1,500+$2,500, or $4,800), all 
of the recovery with respect to D is considered gain on an involuntary 
conversion of property as a result of its destruction or seizure. Under 
the provisions of section 1033, this gain is not recognized if D is used 
for the same purposes for which it was used before it was deemed 
destroyed or seized under section 127(a) of the Internal Revenue Code of 
1939.
    Example 2. The taxpayer on one day recovers $3,000 for property A 
and $7,000 for property B, both of which were treated as war loss 
property for a prior taxable year, and $8,000 of such $10,000 recoveries 
is considered gain on the involuntary conversion of property as a result 
of its destruction or seizure. The taxpayer forthwith expends $5,000 in 
the acquisition of property similar in use to B. Therefore, $5,000 of 
the $8,000 gain is not recognized under section 1033, leaving $3,000 of 
recognized gain. Property B is within the provisions of section 1231(a), 
relating to gains and losses on the involuntary conversion of certain 
described property, but property A is not. Therefore, the provisions of 
section 1231(a) apply to $2,000 of the $3,000 gain, that is, the amount 
of the recovery with respect to B which is not attributable to the 
nonrecognized gain for such day ($7,000 minus $5,000). If the taxpayer 
forthwith expended $8,000 or more for the acquisition of property 
similar in use to B, none of the gain would be recognized. If the 
taxpayer forthwith expended the $5,000 to acquire property related in 
use to A, the $3,000 recognized gain would be considered derived from B 
to the extent of the recovery with respect to B ($7,000), not reduced by 
any nonrecognized gain since none of such recovery is attributable to 
such nonrecognized gain, and therefore all of the $3,000 recognized gain

[[Page 652]]

would be subject to the provisions of section 1231(a).

    (4) An allowable deduction with respect to a war loss is any 
deduction to which the taxpayer is entitled on account of any war loss 
property, regardless of whether or not such deduction was claimed by the 
taxpayer or otherwise allowed in computing his tax. If a deduction was 
claimed by a taxpayer in computing his tax for any taxable year and if 
such deduction was disallowed, such deduction will not be considered an 
allowable deduction for such taxable year since the previous 
determination will not be reconsidered.

[T.D. 6500, 25 FR 12043, Nov. 26, 1960]