[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: 26CFR1.1336-1]

[Page 657-659]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1336-1  Basis of recovered property.

    (a) General rule. (1) Under section 1336(a), the unadjusted basis of 
any war loss property which is recovered and the unadjusted basis of any 
property which is recovered in lieu of or on account of any such war 
loss property is considered the fair market value of such recovered 
property upon the date of its recovery with the following adjustments:
    (i) If the sum of the recoveries for the day such property is 
recovered and of all previous recoveries exceeds the aggregate of the 
allowable deductions for prior taxable years on account of war losses, 
so that a portion of the recoveries for such day is treated as gain on 
the involuntary conversion of property, such fair market value of the 
property is reduced by the total gain, if any, for such day derived from 
such recovered property as determined under paragraph (b) of Sec. 
1.1332-1.
    (ii) Such fair market value, as reduced under subdivision (i) of 
this subparagraph, is increased by the portion, if any, of the 
recognized gain resulting from the recoveries for such day which is 
allocable to such recovered property, as determined under paragraph (b) 
of Sec. 1.1332-1.

In effect, the unadjusted basis of such property is its fair market 
value upon the date of its recovery, reduced by the amount of 
nonrecognized gain attributable to such recovery under the provisions of 
paragraph (b) of Sec. 1.1332-1.
    (2) If the respective bases of several properties of a taxpayer 
determined under section 1336(a) are greatly disproportionate to their 
adjusted bases immediately before their treatment as war loss 
properties, the taxpayer may apply to the Commissioner for the 
allocation of the aggregate of the bases of such properties among them 
in the proportion of their adjusted bases immediately before the 
destruction or seizure of such properties determined under section 
127(a) of the Internal Revenue Code of 1939. The amount so allocated to 
any such property, in an application approved by the Commissioner, shall 
be the unadjusted basis of such property in lieu of the amount 
determined under subparagraph (1) of this paragraph.
    (3) The application to the Commissioner shall set forth a list of 
all the properties of the taxpayer having an unadjusted basis determined 
under this section, a description of each such property together with a 
statement as

[[Page 658]]

to the amount of its adjusted basis immediately before the destruction 
or seizure of such property determined under section 127(a) of the 
Internal Revenue Code of 1939, and a statement as to whether there has 
been any substantial change in the use or nature of the property chosen 
for the allocation from its nature or use immediately before the time it 
was treated as destroyed or seized. Such application will be allowed 
unless there has been such a substantial change in the nature or use of 
such property that the allocation of the bases would produce an 
arbitrary result, or unless the taxpayer has obtained such tax benefits 
by reason of the basis determined under subparagraph (1) of this 
paragraph, that it would be inequitable to change his basis. Thus, the 
allocation will not be allowed if it would give the taxpayer an 
unadjusted basis with respect to any property which is less than the 
amount of the adjustments in reduction of the basis of such property 
which are allowable after its recovery. For example, when property A is 
recovered it has an unadjusted basis of $100. After $70 depreciation has 
been allowed on A, an allocation is sought which would give A an 
unadjusted basis of $60. Since this is less than the depreciation which 
is an adjustment against such basis, the allocation will not be 
permitted.
    (4) The amount of any adjustments to the unadjusted basis determined 
under subparagraph (1) of this paragraph shall, upon the allocation of 
the bases, be taken as an adjustment to the allocated unadjusted basis. 
Thus, if $30 depreciation was allowed upon a $100 basis determined under 
subparagraph (1) of this paragraph and if the unadjusted basis upon 
allocation is $75, such $30 depreciation is allowed against such 
allocated unadjusted basis, so that the adjusted basis of the property 
is then $45.
    (5) The taxpayer may choose any group of recovered properties for 
allocation, except that if any such recovered properties form one 
economic unit, such properties may not be separated but all or none must 
be included in the group. For example, a building may not be separated 
from the land on which it stands if both are recovered property, nor may 
one block of stock in a corporation be separated from other stock in 
such corporation or from bonds in such corporation which are also 
treated as a recovery. If the taxpayer has once been permitted to 
allocate the bases of any group of properties, he may obtain another 
allocation with respect to such properties only if all the properties in 
the original group are included together with other recovered properties 
not included in the original group. For example, if the bases of 
properties A and B are allocated, a second allocation will be made for 
properties A, B, and C, but not for A and C or B and C.
    (b) Property recovered in taxable year to which section 1333 is 
applicable. If, pursuant to an election made by the taxpayer under 
section 1335 and paragraph (a) of Sec. 1.1335-1, the provisions of 
section 1333 are applicable to any taxable year in which the taxpayer 
recovered property in respect of a war loss under section 127(a) of the 
Internal Revenue Code of 1939, the unadjusted basis of such property 
shall be the fair market value of such property determined as of the 
date of the recovery, reduced by the amount of nonrecognized gain 
attributable to such recovery under the provisions of paragraph (b) of 
Sec. 1.1333-1. However, if the property recovered is the same war loss 
property, and if the taxpayer under section 1333(1) includes such 
property in the amount of the recovery at its adjusted basis (for 
determining loss) in his hands on the date such property was considered 
under section 127(a) of the Internal Revenue Code of 1939 as destroyed 
or seized, the unadjusted basis of such property shall be such adjusted 
basis, reduced by the amount of nonrecognized gain attributable to such 
recovery under the provisions of paragraph (b) of Sec. 1.1333-1. The 
fair market value of any property recovered, or the adjusted basis for 
determining loss) of such property if the same property treated as war 
loss property is recovered, shall not be reduced in determining the 
unadjusted basis of such property by the amount of the obligations or 
liabilities with respect to such property in respect of which the 
recovery was received, if the taxpayer for any previous taxable year 
chose under

[[Page 659]]

section 127(b)(2) of the Internal Revenue Code of 1939 to treat such 
obligations or liabilities as discharged or satisfied out of such 
property but such obligations or liabilities were not so discharged or 
satisfied prior to the date of the recovery.

[T.D. 6500, 25 FR 12048, Nov. 26, 1960]