Clifton was a real estate
investment corporation. They owned an office building in Cincinnati and
leased it to a bank. The city bought the building using eminent domain.
Clifton took the money from
the sale and bought 80% of the stock in a holding company that owned
nothing but the right to purchase a hotel in New York.
The corporation went on to
buy the hotel.
When they filed their taxes,
Clifton treated the gain they made on the sale of the Cincinnati hotel as non-recognizable based 26 U.S.C. §1033.
The IRS argued that §1033 is only applicable if the taxpayer buys
property of like-kind to what they were forced to sell. In
this case, Clifton sold an office building and bought a hotel. Those are
two different things, so the §1033
exemption doesn't apply.
Clifton argued that they
were in the business of collecting rent, and that rent from an office
building was the same as rent from a hotel, the new property was
"similar or related in service or use" to the building they had
been forced to sell, so the §1033
exemption does apply.
The Tax Court found for the
IRS. Clifton appealed.
The Appellate Court affirmed.
The Appellate Court found
that renting out an office building to a company was not the same as
running a hotel.
The Court found that §1033 was designed to allow a taxpayer to continue
their previous business. Clifton was now in an entirely new business, so
§1033 does not apply.