Although the Internal Revenue Code clearly requires a "sale or exchange" for capital gain treatment, a surprisingly large body of case law and indeed IRS administrative rulings routinely ignore this requirement in the case of lawsuit recoveries for damage or injury to the taxpayer's property. This article concludes that the failure to apply the "sale or exchange" requirement is inconsistent with the statutory scheme and the prevailing capital gain jurisprudence, and that it constitutes bad policy.
Jensen, Ronald H., "Can You Have Your Cake and Eat It Too? Achieving Capital Gain Treatment While Keeping the Property" (2007). Pace Law Faculty Publications. Paper 403.