Clifton Inv. Co. v. Commissioner Case Analysis Please brief and analyze to this case, DO NOT use any source/reference from other articles. Clifton Iny. Co. v. Commissioner
United States Court of Appeals, Sixth Circuit, 1963.
312 F.2d 719, cert. denied 373 U.S. 921, 83 S.Ct. 1524 (1963).
. BOYD, DISTRICT JUDGE.
Petitioner is a real estate investment corporation organized and
existing under the laws of the State of Ohio, with headquarters in
Cincinnati. In 1956 the petitioner sold to the City of Cincinnati under its
threat of exercising its power of eminent domain a six-story office
building, known as the United Bank Building, located in the downtown
section of that city, which building was held by petitioner for production
of rental income from commercial tenants. The funds realized from the
sale of this property to the city were used by the petitioner to purchase
eighty percent of the outstanding stock of The Times Square Hotel of New
York, Inc., also an Ohio corporation, which had as its sole asset a contract
to buy the Times Square Hotel of New York City. The purchase of the
hotel was effected by the corporation. The taxpayer-petitioner contends
herein that the purchase of the controlling stock in the hotel corporation
was an investment in propertysimilar or related in service or use” to the
office building it had been forced to sell, thus deserving of the
nonrecognition of gain provisions of Section 1033(a)(3)(A), Internal
Revenue Code of 1954 (Title 26 U.S.C.A. Section 1033(a)(3)(A)).1 More
specifically, the taxpayer contends that since both the properties herein
were productive of rental income, the similarity contemplated by the
statute aforesaid exists. The Commissioner ruled to the contrary, holding
that any gain from the sale of the office building was recognizable and a
deficiency was assessed against the taxpayer for the year 1956 in the
amount of $19,057.09. The Tax Court agreed with the Commissioner,
[See I.R.C. § 1033(a)(2). See also I.R.C. § 1033(b)(3) enacted in 1996. Ed.]
In order to determine whether the requisite similarity existed under
called “functional test” or “end-use test.” This it seems has been the Tax
finding that the properties themselves were not “similar or related in
service or use” as required by the statute. 36 T.C. 569. From the decision
of the Tax Court this appeal was perfected.
the statute between the properties herein, the Tax Court applied the so-
Court’s traditional line of inquiry, when similar cases under the within
statute have been considered by it. This approach takes into account only
the actual physical end use to which the properties involved are put,
whether that use be by the owner-taxpayer or by his tenant; that is,
whether the taxpayer-owner is the actual user of the property or merely
holds it for investment purposes, as in the case of a lessor. We reject the
functional test as applied to the holder of investment property, who
replaces such property with other investment property, as in the case at
The Tax Court in this case relied in part on its earlier decision in
Liant Record, Inc. v. Commissioner, 36 T.C. 224 and chiefly on the
decision of the Court of Appeals for the Third Circuit in McCaffrey v.
Commissioner, 275 F.2d 27, 1960, cert. denied 363 U.S. 828, 80 S.Ct.
1598, the latter case approving and applying the aforesaid functional test
in such a case as here presented. However, the Court of Appeals for the
Second Circuit has since reversed the Tax Court’s decision in Liant, 303
F.2d 326, 1962, and in so doing advanced what we consider to be the
soundest approach among the number of decisions on this point. We need
not here review all the relevant decisions, since this is done in the recent
cases of Loco Realty Company v. Commissioner, 306 F.2d 207 (C.A.8)
1962, and Pohn v. Commissioner, 309 F.2d 427 (C.A.7) 1962, both of
which decisions approved the Second Circuit Court’s approach in Liant,
the court in the Pohn case relying specifically on the Liant decision.
Congress must have intended that in order for the taxpayer to obtain
the tax benefits of Section 1033 he must have continuity of interest as to
the original property and its replacement in order that the taxpayer not
be given a tax-free alteration of his interest. In short, the properties must
be reasonably similar in their relation to the taxpayer. This
reasonableness, as noted in the Liant case, is dependent upon a number
of factors, all bearing on whether or not the relation of the taxpayer to
the property has been changed. The ultimate use to which the properties
are put, then, does not control the inquiry, when the taxpayer is not the
user of the properties as in the case under consideration. As exemplary
of the factors which are relevant the Liant decision mentions the
following, after advancement of its “relation of the properties to the
“In applying such a test to a lessor, a court must compare, inter
alia, the extent and type of the lessor’s management activity,
the amount and kind of services rendered by him to the tenants,
DEFERRAL AND NONRECOGNITION OF INCOME AND DEDUCTIONS
and the nature of his business risks connected with the
Thus, each case is dependent on its peculiar facts and the factors bearing
on the service or use of the properties to the taxpayer must be closely
examined. The Tax Court employed an erroneous test in this case, but on
examination of the record, the correctness of the result is manifest.
The record before us discloses that the United Bank Building and
the Times Square Hotel both produced rental income to the taxpayer.
However, examination of what the properties required in the way of
services to the tenants, management activity, and commercial tenancy
considerations reveals an alteration of the taxpayer’s interest. The record
herein shows that the taxpayer corporation itself managed the United
Bank Building, but deemed it necessary to procure professional
management for the Times Square Hotel. There were primarily two
employees for the United Bank Building, who afforded elevator and
janitorial services to the tenants. In the Times Square Hotel between 130
and 140 employees were necessary to attend the hotel operation and offer
services to the commercial tenants and hotel guests. Approximately 96%
of the rental income from the hotel was from the guest room facilities and
the large number of transients required daily services of varying kinds.
Furniture, linens, personal services of every description were furnished
the hotel guests, which were not furnished the commercial tenants of the
United Bank Building. The hotel guests reside in the hotel rooms and
that is obviously the only reason they are tenants. In the office building
herein several tenants also used parts of the premises for living quarters,
but were clearly not furnished the typical services the hotel guest
demands. There was no great limitation placed on the types of
commercial tenants to whom space was rented in the United Bank
Building, but as the enumeration of commercial tenants of the hotel
building reveals, space therein was leased for the most part and
primarily with an eye to how such a business operation might fit in with
the operation of a hotel, how it relates to the hotel guests. It is common
experience that the services offered by a lessee of business premises in a
hotel will reflect in the minds of its guests on the service they associate
with the hotel itself. If a leased restaurant in a hotel offers good or bad
service, there is a tendency to think of the food service at the hotel as
good or bad. A number of unique business considerations enter when
leasing commercial space in a hotel which do not apply to an office
We consider there to be, then, a material variance between the
relation of the office building in question and the within hotel operation
of the taxpayer, in the light of the relevant inquiry found in the Liant
case. It is true that what the taxpayer derived from both properties
herein was generally the same, rental income. But what the properties
demanded of the taxpayer in the way of management, services, and
relations to its tenants materially varied. That which the taxpayer
receives from his properties and that which such properties demand of
the taxpayer must both be considered in determining whether or not the
properties are similar or related in service or use to the taxpayer.?
The decision of the Tax Court is affirmed.
SHACKELFORD MILLER, JR., CIRCUIT JUDGE (concurring).
I concur in the result reached in the majority opinion.
However, I am not willing to adopt, without some modification
thereof, the test adopted and applied in Liant Record, Inc. v.
Commissioner, 303 F.2d 326, C.A.2d, upon which the majority opinion
relies. I think that the investment character of the properties involved
should be given more consideration than what seems to me is given by
the ruling in the Liant case, although I do not think that investment basis
alone is sufficient to comply with the statute, as Steuart Brothers, Inc. v.
Commissioner, 261 F.2d 580, C.A.4th, might be construed as holding. As
pointed out in Loco Realty Co. v. Commissioner, 306 F.2d 207, 215,
C.A.8th, the statute was not intended to penalize but to protect persons
whose property may be taken on condemnation and, accordingly, should
be construed liberally. I agree with the standard adopted in the opinion
in that case, although for our present purposes I do not think that it
results in a reversal of the decision of the Tax Court.
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