REV-RUL, Involuntary conversion; billiard center as replacement property for bowling center., Rev. Rul. 76-319, 1976-2 CB 242, (Jan. 01, 1976)
Rev. Rul. 76-319, 1976-2 CB 242

Section 1033.--Involuntary Conversions

26 CFR 1.1033(a)-2:  Involuntary conversion where disposition of the converted property occurred after December 31, 1950.

[IRS Headnote] Involuntary conversion; billiard center as replacement property for bowling center.-- 
A billiard center in which the taxpayer invested the insurance proceeds from a bowling center which was destroyed by fire is not similar or related in service or use to the converted property and does not qualify as replacement property under section 1033 of the Code.

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Advice has been requested whether, under the circumstances described below, property qualifies as replacement property for purposes of section 1033 of the Internal Revenue Code of 1954.

The taxpayer, a domestic corporation, was engaged in the operation of a recreational bowling center prior to the center’s complete destruction by fire on June 30, 1974.  The bowling center had consisted of bowling alleys, together with a lounge area and a bar.  The center was fully insured against loss by fire.  As a result of such insurance coverage the taxpayer received insurance proceeds in compensation for the destruction of the bowling center in an amount that exceeded the taxpayer’s basis in the property.  On its Federal income tax return for 1974, the taxpayer elected to defer recognition of the gain under the provisions of section 1033 of the Code.

Within the period specified in section 1033(a)(3)(B) of the Code, the taxpayer invested the insurance proceeds in a new recreational billiard center.  In addition to billiard tables, this center includes a lounge area, and a bar.

Section 1033(a) of the Code provides, in part, that if property (as a result of its destruction in whole or in part) is involuntarily converted into money, the gain shall be recognized except as provided in section 1033(a)(3)(A).  Section 1033(a)(3)(A) provides, in part, that if the taxpayer during the period specified purchases other property similar or related in service or use to the property so converted, at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized on the conversion exceeds the cost of such other property.

The specific question is whether the recreational billiard center (replacement property) is “similar or related in service or use” to the recreational bowling center (involuntarily converted property) within the meaning of section 1033(a) of the Code.

Rev. Rul. 64-237, 1964-2 C.B. 319, states that, with respect to an owner-user, property is not considered similar or related in service or use to the converted property unless the physical characteristics and end uses of the converted and replacement properties are closely similar.

In the instant case, the involuntarily converted property was a bowling center that consisted of bowling alleys together with a lounge area and a bar.  The replacement property consists of a billiards center that included billiard tables, a lounge area, and a bar.  The physical characteristics of the replacement property are not closely similar to those of the converted property since bowling alleys and bowling equipment are not closely similar to billiard tables and billiard equipment.

Accordingly, in the instant case, the billiard center is not similar or related in service or use to the bowling center within the meaning of section 1033(a)(3)(A) of the Code.  Therefore the billiard center does not qualify as replacement property for purposes of section 1033.