Leslie Co. v. Commissioner

Leslie Company (Leslie) (plaintiff) operated a manufacturing and distribution plant in Lyndhurst, New Jersey. In May 1967, Leslie acquired property in Parsippany, New Jersey, to construct a new plant. In October 1967, after exploring other financing options without success, Leslie entered into a sale and leaseback agreement with Prudential Life Insurance Company of America (Prudential), conditioned upon the sale price not exceeding $2,400,000 or the actual construction cost, whichever was lower. Leslie spent a total of $3,187,414 on its purchase of the property and construction of the plant. In December 1968, Leslie delivered the deed for the Parsippany property to Prudential for $2,400,000. At the time, the fair market value of the Parsippany property was $2,400,000 and the fair market rental value was $190,560 per month. In 1968 Leslie reported a loss of $787,414 on its income-tax report for the sale of the Lyndhurst plant. The commissioner of Internal Revenue (the commissioner) (defendant) found deficiencies in Leslie’s income-tax returns for 1965, 1966, and 1968 resulting from the disallowance of net-operating-loss carrybacks and investment-credit carrybacks based on the net operating loss claimed from the sale and leaseback on Leslie’s return in 1968. The commissioner asserted that the sale and leaseback fell within the nonrecognition provisions of § 1031 of the tax code and, therefore, the claimed loss was not allowable. Leslie claimed that there was no exchange of property within the meaning of § 1031 of the tax code and, therefore, the loss had to be recognized as a capital expense incurred in order to obtain the lease.