What Are The Income Tax Implications?

A condemnation is a taxable event at the time of vesting. Section 1033 of the Internal Revenue Code of 1954, as amended, deals with “involuntary conversions” and affects reinvesting of proceeds of the condemnation proceeding so as to accomplish a deferral of any capital gains.

THERE ARE STRICT TIME LIMITATIONS UNDER THESE SECTIONS! IMMEDIATE TAX ADVICE SHOULD BE SOUGHT WITH RESPECT TO THESE MATTERS AND AS TO ANY OTHER PROBLEMS WHICH MAY AFFECT AN OWNER AS A RESULT OF THE CONDEMNATION — WE EMPHASIZE — AT THE TIME OF TAKING. DO NOT WAIT UNTIL THE AWARD IS ACTUALLY RECEIVED, WHICH MAY BE YEARS THEREAFTER.

The damages can be both “direct” and “indirect.” Direct damages are the value of the property physically taken. Indirect damages, which are also known as “severance” or “consequential” damages, are the loss in value to the remaining property by reason of the taking of a portion of the property (e.g., loss of frontage or access) or by reason of the use to which the condemned parcel is being put by the government (e.g., a landfill or an incinerator). [There is a technical difference between “severance” and “consequential” damages. Severance damages represent the loss in value (i.e., diminution) in the utility or potential of the remainder land by reason of the taking. Consequential damages are the damages caused to the remainder land resulting from the use of the land taken by the government. For example, if the government takes part of your property to erect an incinerator or toxic waste facility, the resulting damages are consequential.]

A condemnation trial is essentially a trial involving different opinions of expert witnesses. An appraisal must be filed and will be exchanged with the condemning authority which will have its own appraiser and appraisal report. Cases involving partial takings require expert engineering testimony and reports to identify the severance or consequential damages. Where the valuation question of “highest and best use” is dependent on the likelihood of a zoning change, an expert land planner and report will also be required.

All of these reports must strictly conform to specific rules and requirements and filed and exchanged within a specified time in advance of trial. See EDPL §508.

The trial of a claim involving the State is held in the Court of Claims and a trial of a taking by a local government is held in the Supreme Court in the County in which the property is located.

Except in the rarest of circumstances, the claimant cannot collect for the loss of business value, or going concern value, or loss of profits. Damages are strictly limited to the value lost in the real estate, fixtures and equipment. [The legal philosophy underlying this concept is that you cannot recover “business” damages since the condemnor is not “taking” business — just real estate — and the government is obligated to pay only for what it takes — not what the property owner may be losing (i.e., lost profits, etc.).] Leases which speak in terms of the tenant retaining a claim for “business” or “going concern” value have no valuation significance in the process of determining just compensation.

Where the condemnation award is “substantially in excess of the amount of the condemnor’s proof,” the court, “in its discretion,” may award as additional compensation the actual and necessary costs, disbursements and expenses, including reasonable attorney, appraiser and engineer fees actually incurred. EDPL §701 and §702. An application for such fees can only be made at the end of the case. In settlement negotiations, the right to reimbursement is often an important issue for negotiation.

The method by which government actually takes title (i.e., vests title) to the property differs depending on whether the condemning authority is the State (or one of its agencies) or a local government. A specific distinction is made by the EDPL between State appropriations and appropriations made by local government such as county, town, city, or village. The different procedures applicable to a taking by the State in contrast to a taking by a local government are generally set forth in EDPL §402.

A) The State
EDPL §402(A) provides that the State appropriates property by filing a map in the Office of the Clerk of the County in which the property is located and with the “condemning agency” (usually the Department of Transportation). The State takes property simply by the filing of a map. Although the EDPL imposes a number of pre-vesting procedures upon the State and, as a general practice, the State will contact the property owner well before the taking and will hold informational hearings, it is obvious that actual vesting of title may often take place without the property owner being aware of the actual loss of title or the specific date that title is taken. Often, as noted below, it is not until the actual notice of appropriation that the property owner becomes aware of the taking.

(B) Local Governments
In contrast to the State, local governments or condemning authorities follow a more traditional procedure. Public hearings must be held to establish the “public purpose” or necessity for the taking. At the public hearings, comments will be invited from the affected property owners as well as the general public. Usually, there is little question that the purpose of the taking is in the public interest and a finding of public purpose will be issued. This can be challenged, but is rarely successful. See EDPL Article 2. Counsel for the local government will then file a notice of pendency and make a formal application before the Supreme Court in the county in which the property is located. This application is very similar to a plenary action or, for that matter, a special proceeding requiring service upon the property owner with at least twenty days notice in addition to newspaper notice. In most circumstances, there is no opposition to the formal notice to vest title and the application is unopposed. Upon the Court’s signing of the actual vesting order and its entry with the county clerk, title is deemed vested in the condemnor.