A U.S. District Court held that a couple could not defer their taxes under Section 1033 of the Code, for involuntary conveyances, condemnation, thief, etc., when a previous court ordered the couple to specifically perform a contract they voluntarily entered into for the sale of real property.

This case arose after taxpayers Gerald and Darlene Peters executed a purchase agreement to sell certain real property, but later refused to close the sale. The buyer sued Mr. and Mrs. Peters for specific performance in the Saint Louis County Circuit Court and prevailed.

When the taxpayers filed their federal income tax return for the 2002 tax year, they did not report any gain on the sale, asserting that pursuant to Section 1033 the sale was an involuntary conversion. The District Court rejected this claim and held that the sale was not ‘involuntary’ because the taxpayers willingly entered into the original purchase agreement. Moreover, even if the sale was involuntary, according to the court, the taxpayers did not comply with the requirements of the statute. Specifically, section 1033 requires that the taxpayers did not use the proceeds to purchase a replacement property.

See United States v. Peters, No. 4:12 CV 01395, (E.D. MO 2014).

Posted by Theodore H. Waggner, Esq., Associate Editor, Wealth Strategies Journal