## Facts

- Helene C. Johnson owned a farm near Cleveland, Ohio, which she leased to a riding club for equestrian and recreational use.
- A railroad company acquired the farm through condemnation, and Johnson received a cash condemnation award.
- Within the statutory replacement period, Johnson used the proceeds to buy urban commercial land in Cleveland.
- Johnson leased the replacement parcel to Standard Oil Company for use as a gasoline service station site.
- Johnson did not report gain from the condemnation, claiming nonrecognition under I.R.C. § 1033 on the ground that the replacement property was “similar or related in service or use.”
- The Commissioner determined a deficiency, concluding the replacement property was not similar or related in service or use to the condemned farm.

## Issues

1. Whether purchasing urban commercial property leased as a gasoline service station site with condemnation proceeds from a farm leased to a riding club constitutes replacement with property “similar or related in service or use” under I.R.C. § 1033.
2. Whether gain from the condemnation was eligible for nonrecognition under § 1033, or had to be recognized as taxable income.

## Decision

- The Tax Court held the replacement property was not “similar or related in service or use” to the condemned property under § 1033.
- The court sustained the Commissioner’s deficiency determination.
- The condemnation gain was taxable because § 1033 nonrecognition did not apply.

## Legal Principles

- Under I.R.C. § 1033, gain from property compulsorily or involuntarily converted into money (including by condemnation) is not recognized if, within the statutory period, the taxpayer purchases replacement property “similar or related in service or use” and makes the proper election.
- “Similar or related in service or use” is determined by a functional, taxpayer-use comparison focusing on the nature of the taxpayer’s use and the property’s role in the taxpayer’s income-producing activities, not on physical similarity alone.
- Continuity of investment form (e.g., both properties being income-producing rental real estate) is insufficient; the replacement must reflect continuity in the type of use or function.
- Replacing rural farm/recreational land with urban property used as a retail gasoline service station site reflects a substantial change in service or use and fails § 1033’s similarity requirement.

## Conclusion

The Tax Court required functional continuity under § 1033 and ruled that converting a condemned farm leased for riding-club activities into an urban gas-station site was too dissimilar in service or use to defer gain, so the condemnation proceeds produced taxable gain.


Johnson v. Comm'r, 43 T.C. 736 (1965)