                      114 T.C. No. 10



                UNITED STATES TAX COURT



            KAREN Y. NIELSEN, Petitioner v.
     COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 1435-98.                     Filed March 8, 2000.


     P’s residential property was condemned by the
State of South Dakota for purposes of a federally aided
highway construction project. In settlement of the
ensuing condemnation proceedings, P received $65,000.
Subsequently, P and the State became involved in
negotiations and litigation regarding P’s entitlement
under the Uniform Relocation Assistance and Real
Property Acquisition Policies Act of 1970, Pub. L. 91-
646, 84 Stat. 1894 (Relocation Act), to additional sums
enabling her to purchase a comparable replacement
dwelling. This suit was settled for $100,000. P,
relying on a provision of the Relocation Act exempting
payments thereunder from income, reported no capital
gain on the disposition of her home. R determined a
deficiency for taxes attributable to the amount by
which the $65,000 payment to petitioner exceeded her
basis in the property taken.
     Held: The $65,000 received by P in condemnation
of her residence is not exempted from taxation by the
Relocation Act.
                                 - 2 -

       Richard Hopewell, for petitioner.

       Albert B. Kerkhove, for respondent.



                                OPINION

       NIMS, Judge:   Respondent determined a Federal income tax

deficiency for petitioner’s 1992 taxable year in the amount of

$7,022.    The sole issue for decision is whether proceeds received

by petitioner from the condemnation of her residence are subject

to taxation as capital gain to the extent that they exceeded her

basis in the property.

       Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the year in

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

       This case was submitted fully stipulated pursuant to Rule

122.    The stipulations of the parties, with accompanying

exhibits, are incorporated herein by this reference.

                              Background

       Karen Y. Nielsen, formerly known as Karen Y. Mundt, resided

in Sioux Falls, South Dakota, at the time of filing her petition

in this case.    More than 1 year prior to 1989, petitioner had

obtained title to a home located at 222 North Cliff Avenue in
                               - 3 -

Sioux Falls.   This residence had previously been a church and

contained approximately 8,130 square feet with 18 rooms.    Her

cost basis in the property was $25,000.

     During 1989, the State of South Dakota, acting through the

South Dakota Department of Transportation and the South Dakota

Transportation Commission, contacted petitioner and informed her

that acquisition of her property would be necessary for purposes

of a federally aided highway construction project.   The State

then initiated civil condemnation proceedings in May of 1990 by

filing a Petition and Declaration of Taking with a South Dakota

trial court.

     In June of 1992, a relocation agent for the State, Clayton

R. Sonnenschein, inspected petitioner’s property and met with

petitioner’s attorneys to discuss the Federal Relocation

Assistance Program.   He also provided a brochure explaining the

program entitled “South Dakota Relocation Assistance Brochure:

Your Rights and Benefits as a Displaced Person Under the Federal

Relocation Assistance Program”.   The brochure indicated that

displaced persons might be eligible for moving cost reimbursement

and for replacement housing payments.   For homeowners of 180 days

or more, the replacement housing payment was defined as a

purchase supplement which included (1) the price differential

between the cost of a replacement dwelling and the acquisition

cost of the displacement dwelling, (2) increased mortgage
                               - 4 -

interest costs, and (3) incidental expenses.   The brochure

further specified that the replacement housing payment or

purchase supplement was an amount “in addition to the fair market

value of your property”.

     On October 14, 1992, petitioner and the State executed a

Stipulation for Settlement and for Entry of Judgment in

Condemnation, in which they agreed to settle the pending

condemnation action as follows:

     1. Purchase of the entire lot and house is agreed in
     the amount of $65,000.00, inclusive of deposit in
     court. Defendant will provide a deed for said
     transfer.

     2. Possession by the State will be arranged by the
     parties in determining Relocation Assistance.

     3. Relocation Assistance is separate and apart from
     this agreed compensation and is treated as a separate
     proceeding.

Pursuant to this stipulation, the court entered a Judgment in

Condemnation granting the State’s petition and providing in

relevant part:

     IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the
     Defendants have deficiency judgment against the State
     of South Dakota for the difference between $65,000.00
     determined as just compensation, and $4,620.00, having
     been deposited with the Court for the use of the
     Defendants, being in the ammount [sic] of $60,380.00.

                 *   *     *   *       *   *   *

     IT IS FURTHER ORDERED, ADJUDGED AND DECREED that
     possession by the State will be arranged by the parties
     in determining Relocation Assistance.
                               - 5 -

     IT IS FURTHER ORDERED, ADJUDGED AND DECREED that
     Relocation Assistance is separate and apart from this
     agreed compensation and is treated as a separate
     proceeding.

     Shortly thereafter, on October 21, 1992, the State delivered

to petitioner a Relocation Assistance Written Offer based on

relocation agent Sonnenschein’s previous inspection of

petitioner’s property.   Having concluded that the actual living

space in petitioner’s home consisted of approximately 1,500

square feet, Sonnenschein had researched the real estate market

for similar residences and had determined that the price of a

comparable replacement would be $64,900.   Given that the amount

already awarded to petitioner in the condemnation action exceeded

this figure, the relocation assistance offer stated:

     A.   Replacement Housing Payment/Supplement         $    00.00
          Comparable Replacement        $64,900.00
          Displacement Property         $65,000.00
          Difference-Supplement/RHP     $    00.00

     B.   Incidental Expenses: Estimated at $300.00
          Claim to be based on actual allowable expenses

     C.   Moving Expense Payment:
          1.   Actual, Reasonable & Necessary Cost to Move
          2.   Self-move based on Departments Room County
               Schedule: 18 rooms                      $1,600.00

     MOVING OPTION TAKEN:   1( ) 2( )

     By early November, petitioner had received payments from the

State totaling $65,000 and had authorized the trial court to
                                 - 6 -

enter a Satisfaction of Judgment in the condemnation action.      A

warranty deed conveying petitioner’s property to the State was

recorded on November 17, 1992.

     In December of 1992, petitioner’s husband provided

relocation agent Sonnenschein with a floor plan of the North

Cliff property which indicated that a portion greater than 1,500

square feet was being utilized as living space.    Sonnenschein

then revisited the property and prepared a revised relocation

assistance offer using residences comparable to a home of

approximately 2,800 square feet.    The amended offer reflected

that the cost of a comparable replacement would be $99,900 and

that, after subtraction of the $65,000 paid for the displacement

property, the Replacement Housing Payment/Supplement would be

$34,900.

     Subsequently, in May of 1993, petitioner filed a

counterclaim with the trial court seeking additional funds and

asserting, among other things, that the State had failed to

comply with the provisions of Federal law governing the

Relocation Assistance Program.    The matter was eventually

resolved in August of 1996 by a Stipulation for Settlement and

Dismissal of All Causes of Action Pending.    The parties

stipulated that “Relocation assistance payment is agreed to be

$100,000.00 in addition to the $65,000.00 previously paid for
                               - 7 -

this property.”   All claims were then dismissed with prejudice,

and, in September of 1996, payment of the $100,000 was made by

the State.

                            Discussion

     We must decide whether the $65,000 received by petitioner in

condemnation of her residence is taxable to the extent that the

payment exceeded her basis in the property.

     Petitioner contends that the condemnation proceeds are

exempt from taxation pursuant to the Uniform Relocation

Assistance and Real Property Acquisition Policies Act of 1970,

Pub. L. 91-646, 84 Stat. 1894, presently codified at 42 U.S.C.

secs. 4601-4655 (1994) (Relocation Act).    According to

petitioner, the Relocation Act mandates that relocation payments

shall not be treated as income for tax purposes, and the $65,000

at issue is in fact a portion of the relocation assistance she

received from the State.   Hence, in petitioner’s view, the

subject funds can have no tax consequences.

     Conversely, respondent asserts that the Relocation Act does

not exempt from Federal income tax the $65,000 received by

petitioner.   Respondent maintains that the Relocation Act neither

applies to nor addresses the tax treatment of amounts

representing the acquisition cost or just compensation paid when

property is taken for public use.      Rather, respondent interprets

the Relocation Act to remove only payments which are in addition
                                - 8 -

to acquisition cost from the ambit of the Internal Revenue Code.

Therefore, because respondent also contends that the $65,000 was

not such a supplemental relocation assistance payment,

respondent’s position is that to the extent the $65,000 exceeded

petitioner’s basis in her residence, the difference is taxable as

capital gain.   Respondent additionally argues that the $65,000

fails to qualify for nonrecognition treatment under the

involuntary conversion or residential rollover provisions set

forth in sections 1033 and 1034 of the Internal Revenue Code.

(Section 1034 was repealed by section 312(b) of the Taxpayer

Relief Act of 1997, Pub. L. 105-34, 111 Stat. 839, generally

effective for sales and exchanges of principal residences after

May 6, 1997.    The section 1034 rollover provision was replaced by

a revised and expanded section 121.)

     We agree with respondent that the $65,000 received by

petitioner in condemnation of her residence is not a payment of a

type exempted from taxation by the Relocation Act.    Furthermore,

because petitioner apparently does not contend that

nonrecognition treatment pursuant to section 1033 or 1034 is

warranted, we need not reach respondent’s position thereon.

Petitioner made no attempt at trial or on brief to establish her

entitlement to benefit from these sections and instead

characterized respondent’s argument regarding nonrecognition

under the Internal Revenue Code as “immaterial in the Court’s
                                - 9 -

adjudication of the action at bar”.      In light of this posture, we

also sustain petitioner’s evidentiary objections to certain of

the stipulated facts and exhibits.      The contested evidence

addresses only the reinvestment of the condemnation proceeds, and

while such information would have been relevant to applicability

of sections 1033 and 1034, it has no bearing upon our analysis of

the Relocation Act.

I.    Internal Revenue Code

      As a general rule, the Internal Revenue Code imposes a

Federal tax on the taxable income of every individual.      See sec.

1.    Section 61(a) defines gross income for purposes of

calculating such taxable income as “all income from whatever

source derived” and further specifies that gains from dealings in

property are included within this broad definition.      See sec.

61(a)(3).    Section 1001(a) then explains that “gain from the sale

or other disposition of property shall be the excess of the

amount realized therefrom over the adjusted basis”.      The basic

principles of tax law would thus require petitioner to recognize

as income the amount, $40,000, by which the $65,000 she received

from the condemnation of her residence exceeded her $25,000

basis.

II.    Uniform Relocation Assistance Act

      The Relocation Act, however, provides contrasting treatment

for certain payments received in conjunction with Government
                              - 10 -

acquisition of private property and raises the question of

whether a different result is compelled in the matter at hand.

This question, in turn, presents two subinquiries upon which its

resolution depends.   The first, a legal question, asks what is

meant by the term “payment” as used in and exempted from taxation

by the statute.   The second, a factual question, asks whether the

$65,000 received by petitioner is indeed such a payment.

     A.   Meaning of Payment for Purposes of the Relocation Act

     To ascertain the meaning of “payment” as used in the

Relocation Act, we consider the historical context in which the

statute was drafted, the language and structure of the statute

itself, and the interpretations thereof offered by case law.

From these sources, we conclude that “payment” for purposes of

the exemption treatment afforded by the Relocation Act refers

only to amounts received as relocation assistance in excess of

the just compensation paid for the property.

     At the time the Relocation Act was promulgated, payment of

just compensation upon the taking of private property for public

use had long been mandated by the Federal Constitution and by the

constitutions of individual States, including that of South

Dakota.   See U.S. Const. amend. V; S.D. Const. art. VI, sec. 13.

Just compensation had also been further defined, at both the

Federal and State levels, as fair market value, what a willing
                              - 11 -

buyer would pay a willing seller, at the time of the taking.    See

Kirby Forest Indus., Inc. v. United States, 467 U.S. 1, 10

(1984); Rapid City v. Baron, 227 N.W.2d 617, 620 (S.D. 1975).

     Against this backdrop, Congress enacted the Relocation Act

of 1970 for the purpose of ensuring that displaced persons “shall

not suffer disproportionate injuries as a result of programs and

projects designed for the benefit of the public as a whole”.    42

U.S.C. sec. 4621(b).   The Relocation Act was then amended in

1987, see Uniform Relocation Act Amendments of 1987, Pub. L. 100-

17, 101 Stat. 246, and is presently codified at chapter 61 of

title 42 of the United States Code.    Chapter 61 is divided into

three subchapters:   Subchapter I--General Provisions, Subchapter

II--Uniform Relocation Assistance, and Subchapter III--Uniform

Real Property Acquisition Policy.

     The provision addressing taxation is contained in subchapter

II and reads:

          No payment received under this subchapter shall be
     considered as income for the purposes of title 26; or
     for the purposes of determining the eligibility or the
     extent of eligibility of any person for assistance
     under the Social Security Act [42 U.S.C. 301 et seq.]
     or any other Federal law (except for any Federal law
     providing low-income housing assistance). [42 U.S.C.
     sec. 4636.]

     Also within subchapter II, three sections direct that

payments be made to persons displaced in conjunction with Federal

or federally assisted programs.   See 42 U.S.C. secs. 4622, 4623,

and 4624.   Payments for moving and related expenses, see 42
                               - 12 -

U.S.C. sec. 4622, for replacement housing for homeowners, see 42

U.S.C. sec. 4623, and for replacement housing for tenants and

certain others, see 42 U.S.C. sec. 4624, are the three categories

of payments so authorized.    The section relevant to the instant

case, addressing replacement housing for homeowners, provides in

pertinent part as follows:

     42 U.S.C. § 4623.   REPLACEMENT HOUSING FOR HOMEOWNER * * *

          (a)(1) In addition to payments otherwise
     authorized by this subchapter, the head of the
     displacing agency shall make an additional payment not
     in excess of $22,500 to any displaced person who is
     displaced from a dwelling actually owned and occupied
     by such displaced person for not less than one hundred
     and eighty days prior to the initiation of negotiations
     for the acquisition of the property. Such additional
     payment shall include the following elements:

          (A) The amount, if any, which when added to the
     acquisition cost of the dwelling acquired by the
     displacing agency, equals the reasonable cost of a
     comparable replacement dwelling.

          (B) The amount, if any, which will compensate such
     displaced person for any increased interest costs and
     other debt service costs which such person is required
     to pay for financing the acquisition of any such
     comparable replacement dwelling. Such amount shall be
     paid only if the dwelling acquired by the displacing
     agency was encumbered by a bona fide mortgage which was
     a valid lien on such dwelling for not less than 180
     days immediately prior to the initiation of
     negotiations for the acquisition of such dwelling.

          (C) Reasonable expenses incurred by such displaced
     person for evidence of title, recording fees, and other
     closing costs incident to the purchase of the
     replacement dwelling, but not including prepaid
     expenses.

                    *     *     *    *    *    *    *
                                - 13 -

The $22,500 monetary limitation may also be exceeded on a case-

by-case basis for good cause.    See 42 U.S.C. sec. 4626(a).

     Hence, we are faced with a statute which by its terms

exempts from taxation “payment received under this subchapter”

and which is contained in a subchapter that explicitly authorizes

three types or categories of payment.    It is therefore reasonable

to infer that a “payment received under this subchapter” is one

of the types of payment that the subchapter enables a displaced

person to receive.   Yet it is not this subchapter but rather

independent constitutional mandates that enable one whose private

property is taken for public use to receive just compensation.

     Moreover, the language employed in the provision dealing

with replacement housing assistance for homeowners states that

the displaced homeowner’s entitlement is to “The amount, if any,

which when added to the acquisition cost of the dwelling acquired

by the displacing agency, equals the reasonable cost of a

comparable replacement dwelling.”    42 U.S.C. sec. 4623(a)(1)(A).

Nowhere, however, does the statute elaborate upon this concept of

acquisition cost or specify how it is to be calculated.    Since in

the context in which the law was written, the cost to a

governmental entity of acquiring private property was just

compensation or fair market value, we must assume that

acquisition cost as used in the Relocation Act denotes this

constitutionally required just compensation.    Therefore, because
                                - 14 -

other law is both the source and the sole explanation of a

displaced person’s right to acquisition cost or just

compensation, to say that such payments are “received under”

subchapter II of the Relocation Act would defy logic.   We

conclude instead that just compensation is not relocation

assistance and should not be governed by the tax rules applicable

thereto, but it continues to exist as an independent requirement

in no way eliminated by the statute under consideration.

     Case law emanating from Federal and State courts further

supports this interpretation.    For instance, the California Court

of Appeal explained the relationship between just compensation

and relocation assistance as follows:

     “The ‘just compensation’ which a condemnee may recover
     from the condemnor when his property is acquired for a
     public use pursuant to the eminent domain law, as
     contemplated by the Constitution and that law alike, is
     the ‘value’ (or ‘actual value,’ or ‘fair market
     value’), measured at a pertinent time * * * ”. * * *
     Other amounts which may be “compensable” by the public
     entity under the CRAL [California Relocation Assistance
     Laws] or the URA [Uniform Relocation Assistance and
     Real Property Acquisition Policies Act of 1970] result
     from statutory provisions and are independent of the
     constitutional requirement of “just compensation” * * *
     [City of Los Angeles v. Decker, 132 Cal. Rptr. 188, 193
     (Cal. Ct. App. 1976) (quoting City of Mountain View v.
     Superior Court, 126 Cal. Rptr. 358, 363 (Ct. App.
     1975)).]

A similar view of the Relocation Act’s role was taken by the

Kansas Court of Appeals, which stated that “the purpose of
                              - 15 -

federally authorized payments is to supplement traditional

eminent domain compensation, not to create an additional element

of full compensation.”   Spackman v. Spackman, 595 P.2d 748, 750

(Kan. Ct. App. 1979).

     The U.S. Claims Court likewise emphasized the distinctness

and self-contained nature of the Relocation Act when faced with

construing the meaning of “payment” for tax-exemption purposes.

See Strogoff v. United States, 10 Cl. Ct. 584 (1986), affd.

without published opinion 818 F.2d 877 (Fed. Cir. 1987).

Although taxpayers argued that, in the exemption section,

“Congress used the term in a sense which is broader than the

cumulative uses found in the other sections”, the court declared

that “the least strained reading of the provision is that,

following a string of references to payments by government

entities, * * * use of the term ‘payments’ [sic] was intended

merely as a shorthand incorporation of the previous references in

the statute.”   Id. at 589.

     As regards application and how these legally distinct rights

to payment should interact in a factual scenario involving

condemnation, the Missouri Court of Appeals summarized:

          In April, 1973, the Commission commenced an action
     to condemn and acquire appellants’ residence and 7.99
     acres of ground. That suit, no longer the subject of
     any dispute, was concluded by entry of a consent
     judgment in the amount of $38,100.00. Also available
     to appellants, and conceded by the Commission to be
     due, is a relocation assistance payment pursuant to the
     Uniform Relocation Assistance and Real Property
                              - 16 -

     Acquisition Policies Act of 1970, 42 U.S.C. §§ 4601-
     4655 (1976) applicable to state highway projects by
     reason of the contribution of federal funds. This
     relocation payment is defined by statute as that amount
     which, when added to the acquisition cost of the
     dwelling taken, equals the cost of a comparable
     replacement dwelling. 42 U.S.C. § 4623 (1976).

          To compute the appropriate sum of relocation
     assistance, which is subject to a maximum of $15,000.00, it
     is necessary to determine how much was paid in the
     condemnation of the property owner’s former dwelling and to
     deduct that amount from the ascertained cost of a
     replacement dwelling. * * * [Tonnar v. Missouri State
     Highway & Transp. Commn., 640 S.W.2d 527, 529 (Mo. Ct. App.
     1982).]

     Therefore, given the history, language, and interpretations

of the statute, we hold that only payments expressly authorized

by subchapter II and in excess of the just compensation paid for

taken property are exempted from taxation by the Relocation Act.

     B.   Nature of $65,000 Payment Received by Petitioner

     Having determined that the Relocation Act will exempt

petitioner’s $65,000 payment from taxation only if it is in the

nature of relocation assistance rather than just compensation or

acquisition cost, we turn to the question of how these proceeds

should be characterized.   Contrary to petitioner’s averments that

the $65,000 was a portion of her relocation assistance, however,

we find that the documentary evidence presented indicates

otherwise.

     First, as a general proposition, the evidence suggests that

the policy of the State of South Dakota was to maintain a

distinction between fair market value paid for property and
                                - 17 -

assistance under the Relocation Act.     The South Dakota Relocation

Assistance Brochure, prepared for and used by the South Dakota

Department of Transportation, explicitly states that the purchase

supplement for which a homeowner might be eligible under the

statute would be “in addition to the fair market value of your

property” and would be calculated based on the price differential

between acquisition cost and the cost of a replacement dwelling.

     Second, as pertains specifically to petitioner’s case, the

record produced in the condemnation action reflects that the

State in fact followed this general policy of awarding relocation

assistance independent and apart from fair market value or

acquisition cost.   The Stipulation for Settlement and for Entry

of Judgment in Condemnation signed by petitioner in October of

1992 states that “Purchase of the entire lot and house is agreed

in the amount of $65,000.00”.    The Judgment in Condemnation

entered pursuant thereto likewise refers to judgment for the

“$65,000.00 determined as just compensation”.    Yet both documents

contain language expressly declaring that “Relocation Assistance

is separate and apart from this agreed compensation and is

treated as a separate proceeding.”

     The ensuing Relocation Assistance Written Offers made to

petitioner are consistent with the position that the $65,000

already paid was not considered such assistance.    The initial

offer computed petitioner’s Replacement Housing
                               - 18 -

Payment/Supplement at “$00.00” because the cost of a comparable

replacement exceeded the sum paid for the displacement property.

The revised offer similarly deducted the acquisition cost of

$65,000 from the replacement cost of $99,900 to reach a $34,900

Replacement Housing Payment/Supplement.   Hence, subchapter II

authorizes “Replacement Housing for Homeowner”, and the only

amounts designated by these offers as such a Replacement Housing

Payment exclude the $65,000.

     Moreover, in eventual resolution of the litigation between

petitioner and the State, the parties stipulated that “Relocation

assistance payment is agreed to be $100,000.00 in addition to the

$65,000.00 previously paid”.   Again, the $100,000, and not the

$65,000, is the figure specifically labeled as relocation

assistance.

     Taken together, the above documents support a finding that

the relocation assistance in petitioner’s case was in fact the

$100,000 sum negotiated separate and apart from the $65,000

received pursuant to the condemnation judgment.   We further note

that to accept petitioner’s characterization of the $65,000 as an

advance payment of her total relocation assistance would be to

say that no just compensation whatsoever was paid by the State.

We believe it highly unlikely that the State would so disregard

an entrenched constitutional mandate.
                             - 19 -

     In addition, we reject petitioner’s apparent contention that

the real property acquisition policies set forth in 42 U.S.C.

sec. 4651 can or should have a bearing upon our decision.

Petitioner alleges that the condemnation proceedings were

initiated in violation of these policies, stating on brief that

the States’s action

     to condemn Petitioner’s house and therewith pay her
     “market value” of the house as just compensation under
     state law, rather than negotiate compensation equal to
     the cost of a “comparable replacement dwelling” as was
     her federal entitlement, was ultra vires and the state
     condemnation action was thereby void ab inito [sic].

She then goes on to assert that tax-exempt replacement housing

compensation should not be transformed into taxable compensation

by reason of such an ultra vires action.    In response, we observe

that the Relocation Act, 42 U.S.C. sec. 4602(a), declares

specifically that “The provisions of section 4651 of this title

create no rights or liabilities and shall not affect the validity

of any property acquisitions by purchase or condemnation.”

     We therefore hold that the $65,000 received by petitioner is

not a relocation assistance payment exempted from taxation by the

Relocation Act but is just compensation taxable to the extent the

amount paid exceeded her basis in the condemned property.

     To reflect the foregoing,



                                           Decision will be entered

                                   for respondent.
