This is аn appeal by plaintiffs in error from the defendant in error’s Order No. 51657 denying their protest to an assessment of additional State income taxes against them.
For a number of years prior to September 29, 1960, plaintiffs in error, Oklahoma residents, hereinafter referred to both as “taxpayers” and “protestants”, owned two adjoining properties, totaling 313 acres of land, near what was then Oklahoma City’s Municipal Air Port, which was some distance from any of said City’s poрulated residential areas. On that date, under threat of condemnation proceedings to enable construction of an enlarged air port, the couple sold these properties to said City. The net proceеds of said sale amounted to the sum of $552,327.15. The same year, these taxpayers reinvested $529,993.93 of this sum in certain urban, commercial properties in Oklahoma City and Norman, which included structures suitable for various retail and wholesale businеss establishments.
On their joint State income tax return, and amended return, for the year 1960, the taxpayers reported only that part of their capital gains from said sale that had not been reinvested, or $22,333.22, as taxable income, and рaid the tax on it, as such. Thereafter, the Income Tax Division of defendant in error, hereinafter referred to merely as the “Commission”, audited said return, re-figured the tax- — -including the $529,993.93 as taxable income in its calculation — and assessed thé sum оf $14,050.58 as additional income taxes against the taxpayers. Taxpayers thereafter paid said additional sum, but filed a protest against said assessment at the Commission.
The question at issue before the Commission at the subsequent hearing on the taxpayers’ said protest was whether or not the $529,993.93 of sale proceeds, reinvested as aforesaid, within one year of their above described sale, was within the statutory limit on “recognized” capital gains, under the emрhasized portion of 68 O.S.1959 Supp., § 883(o), which reads, in part, as follows:
“(o) (1) If a gain * * * is the result of property involuntarily convert *652 ed after January 1, 19S9, due to its * * * condemnation or threat or imminence thereof, and the property is replaсed by the purchase of other property similar or related in service or use to the property so converted, * * *, and such acquisition is made within one (1) year after the close of the taxable year in which any part of the gain upon conversion is first realized, shall, at the election of the taxpayer, be recognized in the following manner:
“(A) If the property is replaced during the taxable year, the recognized gain shall be limited to that portion of the proceeds not so reinvested, * * *;
The evidence introduced at the hearing on the protest revealed, among others, the facts hereinafter delineated. The 313 acres of land which protestants sold the City, under threatened condemnation, as above indicated, had three frame houses, a barn, a silo, and a cattle feeding shed — all vacant —on it, when the taxpayer, Mrs. Rogers, and her former husband, a Mr. Newsom, later deceased, purchased it in 1943, with the contemplation that Oklahoma City would expand toward the Air Port and enhance the property’s value. This land, with its buildings, will hereinafter be referred to as the “converted property”. Though the Newsoms owned and operated a business called the Bama Pie Company, at which they worked “full time”, they then moved into one of the houses on the converted property. Thereafter, they obtained a tenant to use the land for farming and/or stоck raising, with the hope that their income therefrom might help pay for the property’s purchase price. After a year or two, this operation was given up; and most of the farming materials had been disposed of when Newsom later died in 1949.
None of the property was again rented for any farming, or rural, enterprises until after Mrs. Rogers, then Newsom, married Mr. Rogers in April, 1952. Thereafter, the tillable soil of the acreage was rented to tenants, who raised wheat and cane “on the shares”, while other portions of the land were leased for pasturing stock. The taxpayers rented two of the houses on the property to other tenants for cash rentals, until they built themselves a new brick house there, and moved, out of the third frame house, into it, in 1954. Thereafter, all three of the frame, or wooden, houses were rented to such tenants.
In the aforementioned Order No. 51657, supra, which the Commission entered after the closе of the hearing, it referred to the protestants’ converted property as a “farm”, and specifically found that the property they had purchased to replace it was not “similar or related in service or use” to the condemned property under the here-inbefore quoted wording of Section 883(o) (which is identical in both that section and the one referred to in said Order as “68 O.S.Supp. 1965, Sec. 2310(c)”), and stated:
“The only similarity between the reinvestment prоperty and the farm is that most of the farm was either rented for cash or for a share of the crops, and the commercial buildings are rented for commercial purposes. This is not sufficient to invoke the statute (2310(c) supra) allowing non-recognition on the gain in the sale of the farm.”
The “JUDGMENT” portion of the Commission’s Order denied the protest, holding that the protestants’ “replacement investment in six commercial buildings * * * did not and does not constitute a sufficient continuity of investment to justify recognition of capital gain, and therefore, taxpayers are not entitled to any deduction, but must pay the taxes.” The remainder of the order is as follows:
“It is the further order and judgment of the Tax Commission that the aрplication for waiver of penalty and such interest as is shown by the assessment to have accumulated is hereby denied.”
In urging that the Commission erred in holding that the reinvestment property (in which they reinvested the bulk of the pro
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ceeds from the sale of their original, or converted, property, as aforesaid) was not “similar or related in service or use” to the converted property, protestants contend, that said trial tribunal should have applied the “funсtional use test” described in Liant Record, Inc. v. Commissioner of Internal Revenue, 2 Cir.,
The Commission relies principally upon Filippini v. United Statеs, in which the U. S. District Court’s opinion, appearing at
Our opinion that the taxpayers’ original property, and reinvestment property, was neither of “like kind” or “similar or related in service or use”, renders it unnecessary to discuss their arguments in the “Second Issue” of their brief.
Under a “Third Issue”, the protestants argue, in substance, that the Commission erred in denying their application for waiver of the interest on the additional tax in
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volved, and the penalty assessed against them, for its not having been paid earlier. They indicate the interest, they refer to, accrued between the date their protest was filed and the day — almost two years later —that notice of its hearing was filed. In response, the Commission points out that thе interest sum involved is more than $2,000.00, and cites the statutory provision, which appears as Section 220 in
The Commission’s argument, in support of its position — as does the cited statute — pertains only to its waiver of an unadjudicated claim or protest, and does not rеach controversies, concerning such matters, that are settled by court determination. We hold that the cited statute does not affect this Court’s power to order a remittitur of the interest and penalty in this case; and, considеring all of the circumstances shown here, it is our opinion that the taxpayers should not be burdened with the penalty and interest assessed against them by the Commission’s order; and we so hold.
In accord with the foregoing, the order and/or judgment appealed from is affirmed, upon condition that the Oklahoma Tax Commission remit all sums of penalty and interest assessed against the taxpayers on the State income taxes here involved, within 10 days after this opinion becomes final. It is so ordered.