FACTS: Petitioner, a real estate investment corporation, sold a building to a city rather than have the city exercise its powers of eminent domain. The building in question was a rental property. Petitioner used the funds it received to buy a hotel. Petitioner contended that it was entitled to the non-recognition of gain under § 1033(a)(3)(A) because the purchase of the hotel's stock was investment in property of a "similar or related service or use." Respondent assessed a deficiency against petitioner. The tax court entered judgment in favor of respondent. On review, the court determined that petitioner was not entitled to the benefits under § 1033(a)(3)(A). The tax court used the functional test to determine whether the properties were similar. The court rejected the use of this test. The court found that petitioner was required to have a continuity of interest in the original property and its replacement. The property must have been reasonably similar in their relation to the taxpayer. The ultimate use of the property was not determinative. Because the acquisition of the hotel altered petitioner's interest, it was not entitled to the tax benefits of § 1033(a)(3)(A).
CONCLUSION: The court affirmed the decision in favor of respondent in a dispute over whether petitioner was entitled to a non-recognition of gain.
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