§136.  Recognition of gain or loss; involuntary conversions

A.  General rule.  The rules set forth in this Section apply only to instances in which property is compulsorily or involuntarily converted, as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof.  

(1)  Conversion into similar property.  If property is converted into property similar or related in service or use to the property so converted, no gain shall be recognized.  

(2)  Conversion into money where disposition occurred prior to January 1, 1958.  If property is converted into money, and the disposition of the converted property occurred before January 1, 1958, no gain shall be recognized if such money is forthwith in good faith, under regulations prescribed by the collector, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund.  If any part of the money is not so expended, the gain shall be recognized to the extent of the money which is not so expended (regardless of whether such money is received in one or more taxable years and regardless of whether the money which is not so expended constitutes gain).  For purposes of this paragraph and paragraph (3), the term "disposition of the converted property" means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation.  

(3)  Conversion into money where disposition occurred after December 31, 1957.  If property is so converted into money or into property not similar or related in service or use to the converted property, and the disposition of the converted property (as defined in paragraph (2)) occurred after December 31, 1957, the gain, if any, shall be recognized except to the extent hereinafter provided in this paragraph.  

(a)  Nonrecognition of gain.  If the taxpayer during the period specified in Sub-section A(3)(b) of this Section, for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property or such stock.  Such election shall be made at such time and in such manner as the collector may by regulations prescribe.  For purposes of this paragraph:

(i)  no property or stock acquired before the conversion of the property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such conversion; and

(ii)  the taxpayer shall be considered to have purchased property or stock only if, but for the provisions of Sub-section A(3)(a) of this Section, the unadjusted basis of such property or stock would be its cost within the meaning of R.S. 47:140.  

(b)  Period within which property must be replaced.  The period referred to in Sub-section A(3)(a) of this Section shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending--

(i)  one year after the close of the first taxable year in which any part of the gain upon the conversion is realized, or

(ii)  subject to such terms and conditions as may be specified by the collector, at the close of such later date as the collector may designate on application by the taxpayer.  Such application shall be made at such time in such manner as the collector may by regulations prescribe.  

B.  Property sold pursuant to reclamation laws.  For purposes of this Chapter, if property lying within an irrigation project is sold or otherwise disposed of in order to conform to the acreage limitation provisions of federal reclamation laws, such sale or disposition shall be treated as an involuntary conversion to which this Section applies.  

C.  Livestock destroyed by disease.  For purposes of this Chapter, if livestock is destroyed by or on account of disease, or is sold or exchanged because of disease, such destruction or such sale or exchange shall be treated as an involuntary conversion to which this Section applies.  

D.  Livestock sold on account of drought.  For purposes of this Chapter, the sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number the taxpayer would sell if he followed his usual business practices shall be treated as an involuntary conversion to which this Section applies if such livestock are sold or exchanged by the taxpayer solely on account of drought.  

Amended by Acts 1958, No. 242, §8.