## Facts

- Jordan Marsh Co. operated a Boston department store on real property it owned in fee.
- In 1944, Jordan Marsh conveyed its fee interests in the property (described in the record as two parcels used for its store operations) to unrelated buyers for $2,300,000 in cash, a stipulated amount equal to the property’s fair market value.
- The conveyance was not subject to a repurchase option or other right to reacquire the fee.
- At the same time as the transfer, Jordan Marsh obtained a lease of the same property back from the buyers for a term of 30 years and 3 days.
- The lease included renewal rights for an additional 30 years, contingent on Jordan Marsh constructing a new building on the land.
- Jordan Marsh was required to pay rent equal to the property’s rental value (i.e., normal market rent), so the leasehold was not treated as having independent “equity” or capital value beyond the right to occupy at market terms.
- On its 1944 return, Jordan Marsh sought tax treatment consistent with a sale (including recognition of a loss measured by its basis versus the cash received).
- The Commissioner denied the requested tax benefits and assessed a deficiency of $2,101,823.39, asserting that the overall arrangement amounted to a like-kind exchange because Jordan Marsh received a long-term leasehold that Treasury regulations treated as equivalent to a fee interest.
- The United States Tax Court agreed with the Commissioner and sustained the deficiency; Jordan Marsh petitioned for review in the Second Circuit.

## Issues

1. Whether Jordan Marsh’s 1944 transfer of the fee for full-value cash, coupled with a long-term leaseback at market rent, was a taxable sale with recognized loss under I.R.C. 1939 § 112(a), or a nonrecognition like-kind exchange under § 112(b)(1) (and related provisions) because the leasehold exceeded 30 years.

## Decision

- The Second Circuit reversed the Tax Court.
- The court held the transaction was a sale, not a like-kind exchange.
- Because Jordan Marsh received cash equal to the property’s fair market value and did not receive a replacement property interest that continued its capital investment in the real estate, the claimed loss was recognizable.

## Legal Principles

- Like-kind exchange nonrecognition applies when the taxpayer swaps property for property of like kind in a way that leaves the taxpayer’s investment in a continuing property form; it does not apply when the taxpayer liquidates the investment for full-value cash.
- A sale-and-leaseback can be treated as a sale where the transfer of the fee is unconditional, the consideration is full fair market value cash, and the leaseback is a separate occupancy arrangement at normal market rent.
- A long-term leasehold obtained at full market rent may be only a right of use and not a replacement capital asset comparable to the fee interest conveyed.
- Treasury regulations that treat certain long-term leaseholds as equivalent to fee interests for exchange purposes do not require nonrecognition where, on the facts, the taxpayer did not in substance exchange a fee for a substitute ownership interest but instead sold for cash and then leased as a tenant.
- When a transaction does not satisfy the statutory requirements for nonrecognition under § 112(b)(1) (and related provisions), the general recognition rule of § 112(a) applies, permitting recognition of gain or loss.

## Conclusion

Jordan Marsh’s 1944 sale-and-leaseback was treated as a taxable sale because the company received full fair market value cash for an unconditional transfer of the fee and then leased the property back at market rent, leaving it with no continuing ownership-type investment that would qualify as a like-kind exchange; the Second Circuit therefore reversed the Tax Court and allowed loss recognition.


Jordan Marsh Co. v. Commissioner, 269 F.2d 453 (1959)