Friday, September 30, 2005
Brian R. Lynn (Allen, Matkins, Gamble, Leck & Mallory, Irvine, CA) has published Tax Planning for Involuntary Conversions: How to Maximize Gain Deferral When a Disaster Strikes, also available on the Tax Analysts web site as Doc 2005-19701, 2005 TNT 186-25. Here is the Introduction:
You won't see many panel discussions titled "Tax Planning for Involuntary Conversions" at your next tax conference. After all, § 1033 is a relief provision normally used by individuals to defer their gain when their house burns down and they get insurance payments. In the business context, however, companies should think about that provision when planning for their worst-case scenario, because § 1033 can let companies avoid a large realized gain when property is taken or destroyed. And minor changes (for example, revising contract language, preparing appropriate substantiation documents) can determine whether a company must pay tax today, or years down the road. Tax advisers ignore those planning ideas because time is short and the tax savings are contingent. But as Hurricane Katrina recently reminded us, the losses from these disasters can be far too real.
This article does two things. First, it reviews the existing guidance on the question of when payments are made to compensate for lost property, and thus are eligible for § 1033 deferral. Second, it provides tax-planning ideas that can help taxpayers best position themselves to obtain § 1033 relief should their property be involuntarily converted. Those planning tools are easy to implement and generally involve simple steps, such as reviewing contracts to ensure that the language envisions lost-property damages (rather than lost profits or revenues). As such, this is one area where in-house and outside tax advisers can take a proactive approach and show their clients that they are thinking about their clients' larger tax picture before problems arise.