The issue in this case is whether the gain realized by W. & B. Liquidating Corp. (W. & B.) upon the conversion, as a result of fire, of its machine shop is entitled to the benefit of the nonrecognition provisions of section 1033. More specifically, the issue is whether W. & B. "purchased other property" within the specified replacement period.

W. & B. was engaged in the manufacture and marketing of candles. On March 2, 1972, its machine shop was severely damaged by an explosion and fire. While the building was being reconstructed, the shareholders of W. & B. adopted a plan of complete liquidation. On May 31, 1972, W. & B. sold all its assets, including the right to the insurance proceeds for reconstruction of the machine shop, to Syracuse China Corp. (Syracuse). W. & B. paid its contractor, Frank Conlon (Conlon), $43,007.36 for work completed on the machine shop as of May 31, 1972. Reconstruction was completed on October 25, 1972, and Syracuse paid Conlon the $113,973 balance due for his work. On March 15, 1973, W. & B. distributed all of its assets, then consisting of cash, to its shareholders in complete liquidation.

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The gain realized by W. & B. as a result of the conversion of its machine shop is not entitled to nonrecognition under section 337(a) since the fire occurred prior to the adoption by W. & B. of a plan of liquidation. Central Tablet Manufacturing Co. v. United States, 417 U.S. 673 (1974). However, respondent applies the nonrecognition provisions of section 1033(a)(3)(A) where a corporation elects to replace the property involuntarily converted and subsequently adopts a plan of liquidation under sections 331(a)(1) and 337(a) before the property is replaced if the replacement is completed (1) within the replacement period and (2) prior to completion of the corporate liquidation. Rev. Rul. 55517, 1955-2 C.B. 297.

Petitioners contend that the requirements of Rev. Rul. 55–517, supra, were met in that W. & B. completed restoration of the machine shop on or about October 25, 1972, prior to the expiration of the period for replacement and prior to the completion of the liquidation of W. & B. Respondent, on the other hand, contends that W. & B. did not "purchase" the portion of the property that was reconstructed after May 31,

"But see sec. 4, Pub. L. 95-628, 92 Stat. 3628, effective for taxable years ending after Nov. 10, 1978, which would allow corporations 60 days after a casualty to adopt a sec. 337 plan.

1972, the date W. & B. sold its entire business to Syracuse; Syracuse completed restoration of the machine shop. Therefore, respondent contends that W. & B. must recognize gain with respect to the amount realized on conversion less the amount W. & B. paid Conlon prior to May 31, 1972. See sec. 1033(a)(3)(A). We agree with respondent.

It is well settled that for purposes of section 1033(a)(3)(A) a purchase occurs "when ownership of the property is acquired, and that acquisition of ownership takes place upon the passage of the benefits and burdens of ownership of the property." Dettmers v. Commissioner, 430 F.2d 1019, 1021–1022 (6th Cir. 1970), affg. Estate of Johnston v. Commissioner, 51 T.C. 290 (1968). Factors indicating that the benefits and burdens of ownership have shifted include the passage of title, payment of taxes and insurance, and possession and control of the premises. Dettmers v. Commissioner, supra; Fort Hamilton Manor, Inc. v. Commissioner, 51 T.C. 707, 720 (1969), affd. 445 F.2d 879 (2d Cir. 1971).

In this case, W. & B. held the benefits and burdens of the partially reconstructed machine shop only during the time it remained owner and operator of the candle manufacturing business. Until the business was sold to Syracuse, W. & B. held legal title to, paid insurance and taxes on, and possessed and controlled the machine shop as partially reconstructed. W. & B. paid Conlon $43,007.36 for work completed as of May 31, 1972. Syracuse acquired ownership of the machine shop as of May 31, 1972. After that date, Syracuse held legal title and possession and control of the machine shop as it was gradually being rebuilt.

Petitioners contend, however, that the contract between W. & B. and Conlon is evidence that W. & B. purchased the rebuilt machine shop. They note that the contract remained in effect even after the sale of assets to Syracuse and W. & B. remained primarily liable on the contract. However, Syracuse assumed this liability at the time it purchased W. & B.'s assets and if it had not paid for reconstruction of the machine shop and Conlon had looked to W. & B. for payment, W. & B. would have had a right to reimbursement from Syracuse. Therefore we agree with respondents that W. & B. did not "purchase" replacement

Respondent appears to base his conclusion in part on the fact that Syracuse, not W. & B., paid Conlon the balance due of $113,973.49. Because we hold that W. & B. did not "purchase other

property as required by section 1033(a)(3)(A). To hold otherwise would undermine the holding of Central Tablet Manufacturing Co. v. United States, supra. Here, W. & B. has sold all its property to Syracuse, has assigned Syracuse the insurance proceeds, and Syracuse had assumed W. & B.'s obligations under the contract with Conlon to rebuild.

In the alternative, petitioners contend that Syracuse acted as W. & B.'s agent in completing its replacement of the machine shop. Petitioners rely on Estate of Goodman v. United States, 199 F.2d 895 (3d Cir. 1952), and Estate of Morris v. Commissioner, 454 F.2d 208 (4th Cir. 1972), which held that purchases existed for purposes of section 1033(a)(3)(A) where fiduciaries acted on behalf of the decedent taxpayers and where those actions were under court supervision to carry out the decedent's intent. Here we have no evidence of any agency or fiduciary relationship between W. & B. and Syracuse, court-supervised or otherwise. See Fort Hamilton Manor, Inc., 51 T.C at 719-720. Petitioners did not present any evidence showing that Syracuse was under an obligation to W. & B. to complete reconstruction of the machine shop. The relationship between W. & B. and Syracuse was that of purchaser and seller. Syracuse invested the assigned insurance proceeds in its own interest as owner of the machine shop.

Accordingly, we conclude that petitioners must recognize gain on that portion of the insurance recovery related to the work completed after May 31, 1972, since W. & B. did not purchase, within the meaning of section 1033(a)(3)(A), any replacement property after that date.

Decision will be entered for the respondent.

property" as required by sec. 1033 in that it did not possess the benefits and the burdens of the machine shop after May 31, 1972, we need not address respondent's argument. We note in passing, however, that the predecessor to sec. 1033(a)(3), sec. 112(f), I.R.C. 1939, required that the proceeds from the property involuntarily converted be directly traceable to the replacement property. This requirement was eliminated as of Dec. 31, 1950, and in its place, Congress substituted the present language requiring a purchase of other property similar or related in use. Sec. 1(a), Pub. L. 251, 65 Stat. 746.

NATIONAL HOME PRODUCTS, INC., A DELAWARE CORPORATION; WISCONSIN TOBACCO CO., INC., A WISCONSIN CORPORATION, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE,

Petitioners discovered a sizeable shortage in their tobacco inventories near the end of 1970 which they believed to be from abnormal causes. However, they did not file claims against their insurance carrier or the alleged perpetrators of the misappropriation until after Dec. 31, 1970. Petitioners reduced their ending inventories of tobacco for 1970 to reflect the shortage, thus reducing taxable income. Respondent disallowed the inventory adjustment on the grounds of inadequate inventory records. Held: 1. Petitioners proved that they suffered a loss of inventory in 1970 and were entitled to account for the loss by a downward adjustment of ending inventories and a consequent increase in cost of goods sold for 1970.

2. Respondent proved that petitioners had claims for reimbursement for the loss with respect to which there was a reasonable prospect of recovery as of Dec. 31, 1970.

3. The "reasonable prospect of recovery" test provided in sec. 1.165-1(d)(2)(i), Income Tax Regs., for determining the year of deductibility of casualty losses under sec. 165, I.R.C. 1954, is not applicable to casualty losses of inventories.

George M. Zimmermann and Henry W. Cornell III, for petitioners.

Stephen M. Miller, for respondent.

DRENNEN, Judge: Respondent determined deficiencies in petitioners' income tax as follows:

consolidated return for the taxable year 1970 of a reduction in the closing inventory of National Home Products, Inc., made in computing its cost of goods sold for 1970 and from disallowance of a deduction for legal and professional fees. Resulting loss carryback disallowances account for the deficiencies in the other taxable years.

Petitioners having stipulated that the disallowance of the deduction for legal and professional fees was proper, the issues presented in this case involve the adjustment to National Home Products, Inc.'s ending inventories. These issues are:

(1) Whether petitioners suffered actual shortages in tobacco inventories during 1970 and if so, whether their inventory records are sufficient to establish the amounts thereof.

(2) Whether petitioners had a claim for reimbursement for the value of the missing inventory which had a reasonable prospect of recovery as of December 31, 1970.

(3) Whether the "reasonable prospect of recovery test" set forth in section 1.165–(1)(d)(2)(i), Income Tax Regs., is applicable to casualty losses of inventories.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. Petitioner National Home Products, Inc., is a Delaware corporation whose principal office at the time of filing of its petition herein was in Buffalo, N.Y. Until April 1, 1974, the corporate name of petitioner, National Home Products, Inc., was Scotten, Dillon Co. Petitioner will be referred to hereinafter as Scotten, Dillon.

Petitioner Wisconsin Tobacco Co., Inc. (hereinafter referred to as Wisco), is a Wisconsin corporation whose principal office at the time of filing of its petition herein was in Viroqua, Wis.

Scotten, Dillon filed its corporate income tax return for the taxable year 1967 with the District Director of Internal Revenue at Detroit, Mich. Wisco filed corporate income tax returns for the fiscal years ended April 30, 1966, and April 30, 1967, and for the year ended December 31, 1968, with the District Director of Internal Revenue at Milwaukee, Wis. Wisco filed its corporate income tax return for the taxable year 1969 with the Internal Revenue Service at Kansas City, Mo. Scotten, Dillon, together with five subsidiaries including Wisco, filed a consolidated