Johnson v. Commissioner — What Qualifies as a Condemnation Threat

Johnson v. Commissioner (T.C. Memo. 1998-448) is one of the most practically useful Tax Court decisions in condemnation tax law. It establishes that formal condemnation proceedings are not required to trigger section 1033 treatment — oral threats by authorized government officials can suffice, provided the evidence meets an objective standard from the seller's perspective.

A Note on Condemnation Case Law: Condemnation matters are relatively uncommon in Tax Court, and as a result there are very few litigated cases interpreting the boundaries of section 1033. Johnson v. Commissioner and 815 Riverside are among the most frequently cited precisely because the universe of precedent is small. Practitioners should be aware that the case law in this area is thin — which makes careful pre-closing planning and contemporaneous documentation even more important than in areas with deeper judicial guidance.

The Facts of Johnson

The taxpayers in Johnson owned property used for automobile dealerships. After abandoning a proposed relocation to a competing city, local officials repeatedly told them that the city would condemn their property unless they sold it and relocated to the city's auto mall. The redevelopment agency and city council authorized those threats. The taxpayers ultimately sold the property and acquired similar replacement property. The IRS challenged the section 1033 treatment. The Tax Court found for the taxpayers.

The Three-Factor Test

The Tax Court in Johnson identified three factors that, taken together, established a qualifying threat of condemnation:

1. The condemning body possessed, or could readily obtain, eminent domain authority.
2. An authorized government official told the owner that condemnation would be pursued unless a sale or exchange occurred.
3. The circumstances gave the owner reasonable grounds to believe the threat was authorized and likely to be carried out.

The court applied an objective standard from the perspective of a reasonable seller. Repeated statements by multiple officials, authorization by the governing bodies, hostile negotiations, and the taxpayer's consultation with counsel all supported the conclusion that the threat was genuine. The court also held that the taxpayer's awareness of favorable tax treatment did not, by itself, establish a collusive transaction.

The Contrast: 815 Riverside Co. v. Commissioner

In 815 Riverside Co. v. Commissioner (T.C. Memo. 1987-524), the government had authority to condemn but never seriously contemplated doing so. The taxpayer wanted to sell. Officials did not seriously contemplate condemnation. And crucially: the taxpayer's own attorney requested a written condemnation threat — for tax purposes. Section 1033 treatment was denied. The contrast with Johnson is sharp: in Johnson the threat was real and came from multiple authorized officials. In 815 Riverside it was fabricated at the taxpayer's request.

Statutory Framework

Under section 1033(a), gain from property compulsorily or involuntarily converted because of condemnation or the "threat or imminence" of condemnation may be deferred if the taxpayer timely purchases qualifying replacement property. For qualifying condemned real property held for business or investment, section 1033(g)(1) applies the like-kind standard. The replacement period is three years after the close of the first taxable year in which gain is realized.

What Johnson Means for Practice

For the eminent domain attorney, Johnson establishes that the section 1033 analysis should begin when the client first reports pressure from government officials — not when formal condemnation proceedings are filed. If the government is making credible threats and the client is considering a sale, the question of whether section 1033 applies is live, and the documentation of those threats begins to matter immediately.

Documentation That Supports a Johnson Argument:

1. Document authorized governmental statements contemporaneously — who said what, when, in what capacity, and with what authority.
2. Establish that the condemning body possessed or could readily obtain eminent domain authority.
3. Record the owner's contemporaneous belief that the threat was credible and likely to be carried out.
4. Document the causal connection between the threat and the decision to sell.
5. Retain counsel's advice contemporaneously.
6. Never solicit or request a written threat for tax purposes — it is far more likely to defeat the section 1033 claim than to support it.

The Bottom Line

Johnson v. Commissioner establishes a workable, evidence-based framework for determining whether a transaction qualifies as an involuntary conversion under a threat of condemnation. Given how few condemnation cases have been litigated, Johnson carries significant weight. The documentation that supports a Johnson argument should reflect what actually happened — threats made, officials identified, negotiations conducted, counsel consulted — not a threat solicited after the fact.

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This communication is provided for educational and informational purposes only and does not constitute legal, tax, accounting, or investment advice. The strategies discussed are general in nature and may not apply to specific individual circumstances. Any examples are hypothetical illustrations and are not a guarantee of any particular result. Tax laws are complex and subject to change; readers should consult qualified tax and legal professionals before acting on any strategy discussed.

Matt Chancey, Ross Brannon, Johnny Borrelli and Jacob Harvey are Registered Representatives of Crescent Securities Group, Inc. ("CSG"), Member FINRA/SIPC and an Investment Advisory Representative of Crescent Advisor Group, Inc. ("CAG"), an SEC Registered Investment Advisor. Neither CSG or CAG are affiliated with Tax Alpha Companies, Including Tax Alpha Title and Tax Alpha Solutions. Brokerage services offered through CSG. Investment advisory services offered through CAG. Steve Medendorp is a Florida licensed attorney but does not provide any legal or tax advice. Steve Medendorp and CSG or CAG are not affiliated.

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