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.