Leslie Co. v. Commissioner

Leslie Company (Leslie) (plaintiff) is a corporation engaged in manufacturing and distribution. In March 1967, Leslie purchased land for a new plant in Parsippany, New Jersey. However, it was unable to obtain financing for construction. Leslie therefore entered into a sale and leaseback arrangement with Prudential Life Insurance Company of America (Prudential), under which Leslie would build the plant and Prudential would purchase the constructed plant for the lesser of its projected cost of $2,400,000 or its actual cost. Prudential would then lease the plant back to Leslie. In 1968, Leslie completed construction on the plant, having spent $3,187,414. Leslie unconditionally conveyed the plant to Prudential for $2,400,000, a price consistent with the fair market value for property in the area. Pursuant to the agreement, Prudential leased the plant to Leslie for a 30-year term at an annual rental of $190,560, which was consistent with the fair rental value of properties in the area. The lease specified that in the event of condemnation or damages to trade fixtures or structural improvements, Prudential would have the right to all proceeds and Leslie would not be entitled to take a deduction for its leasehold interest. On its income tax return for 1968, Leslie reported a $787,414 loss from the sale of the plant. The Commissioner ruled that no recognizable loss had occurred because the transaction was a nontaxable exchange covered by Internal Revenue Code § 1031. The Commissioner held that the $787,414 was a capital expense incurred to obtain the lease and required its amortization over the course of the 30-year lease. The Tax Court disagreed, ruling that the transaction was a sale and that the loss was recognizable in the year incurred. Specifically, the Tax Court found that the leasehold had no capital value and was therefore not a part of the consideration paid for the plant.