Leslie Co. v. Commissioner
539 F.2d 943 (3d Cir. 1976)
Leslie was a company that
needed a new factory, but were unable to acquire the $2.4M for
construction. They made a deal with Prudential that Leslie would build
the factory and then immediately sell it to Prudential for $2.4M.
Prudential would then lease the property back to Leslie.
The factory went over budget
and eventually costs about $3.2M to build. Leslie sold the factory to
Prudential for the agreed upon $2.4M.
Then they filed their taxes,
Leslie claimed a loss of $3.2M - $2.4M = $800k from the sale of the
property. The IRS disagreed.
The IRS argued that the type
of transaction (called a leaseback transaction) was an exchange of
like-kind properties, and the loss was not deductible because of the nonrecognition
exemption in 26 U.S.C. §1031.
The IRS argued that the
$800k was really just Leslie's cost to obtain the lease, and the $800k
should be amortized over the 30-year lease.
The Tax Court found for
Leslie. The IRS appealed.
The Tax Court found that
Leslie would not have sold the property to Prudential without the
guarantee of a leaseback.
However, the Court found
that §1031 requires there to be
an exchange of properties. The lease Leslie received was not the same
kind of property as the factory they had sold. Since §1031 requires an exchange of like-kind
properties, it did not apply.
The Appellate Court affirmed.
The Appellate Court found
that the Leslie would have to pay fair market value for rent, so they
weren't getting anything in exchange for the sale to Prudential. The
only thing Leslie really gained from the sale was $2.4M in cash.
If Prudential was leasing
the factory for below market prices, then maybe things would be
different, but they weren't.
The Court found that Leslie
had sold property and received only cash in exchange. Therefore there
was no exchange that would invoke the nonrecognition exemption in §1031.