## Facts

- Clifton Investment Company, an Ohio real-estate investment corporation, owned a six-story Cincinnati office building held to produce rental income from commercial tenants.
- In 1956, Clifton sold the building to the City of Cincinnati under threat of condemnation, constituting an involuntary conversion.
- Clifton used the proceeds to buy 80% of the outstanding stock of a corporation whose sole asset was a contract to purchase the Times Square Hotel; the corporation later acquired the hotel.
- Clifton elected § 1033 treatment, asserting the replacement investment was “similar or related in service or use” because both properties generated rental income.
- The Commissioner determined a 1956 income-tax deficiency of $19,057.09; the Tax Court sustained the deficiency, and Clifton petitioned for appellate review.

## Issues

1. Whether purchasing 80% of the stock of a hotel corporation with involuntary-conversion proceeds qualifies as replacement property “similar or related in service or use” to a condemned office building under I.R.C. § 1033(a)(3)(A) (1954).

## Decision

- The Sixth Circuit affirmed the Tax Court.
- The court held that the hotel-related investment was not “similar or related in service or use” to the office building under § 1033(a)(3)(A).
- The gain from the involuntary sale had to be recognized; the Commissioner’s deficiency determination was sustained.
- A concurring judge agreed in the result but cautioned against an overly strict construction given § 1033’s remedial purpose.

## Legal Principles

- Under I.R.C. § 1033(a)(3)(A) (1954), gain from an involuntary conversion is not recognized only if proceeds are timely reinvested in property “similar or related in service or use.”
- The “functional” or “end-use” test assesses similarity by comparing the properties’ actual physical end use and functional role, not merely whether both produce income.
- Similarity requires more than shared income-producing character; materially different operational demands and uses (e.g., commercial office leasing versus hotel operations) defeat § 1033 nonrecognition.

## Conclusion

The court required functional similarity under § 1033 and rejected the taxpayer’s income-based comparison, holding that reinvesting condemnation proceeds in controlling stock of a hotel enterprise was not “similar or related in service or use” to an office building held for commercial rentals, so the gain was taxable.


Clifton Inv. Co. v. Comm'r, 312 F.2d 719 (6th Cir. 1963), cert. denied, 373 U.S. 291 (1963)