## Facts

- Leslie Company, a New Jersey manufacturer, needed a new plant and bought land in Parsippany, New Jersey, intending to construct a facility.
- Leslie could not obtain sufficient construction financing and entered a sale-leaseback arrangement with Prudential Life Insurance Company of America.
- Under the arrangement, Leslie built the plant to Prudential-approved specifications; Prudential then purchased the land and building and immediately leased the facility back to Leslie.
- The purchase price was $2,400,000 or actual cost, whichever was less; construction was completed in 1968 at a cost of $3,187,414, and Leslie conveyed the plant to Prudential for $2,400,000.
- The initial lease term was 30 years with annual net rent of $190,560 (7.94% of purchase price), plus two 10-year renewal options at $72,000 per year (3% of purchase price).
- Leslie had limited, optional rights to offer to repurchase the property at specified prices at five-year intervals beginning in the 15th lease year.
- The lease allocated condemnation and certain damage proceeds to Prudential and denied Leslie compensation or deductions for any leasehold interest.
- On its 1968 return, Leslie claimed a loss of about $787,414 (cost minus sale price).
- The Commissioner disallowed the loss, treating the transaction as a § 1031 like-kind exchange (or, alternatively, treating the loss as a capitalized lease-acquisition cost amortizable over the lease term).
- The Tax Court allowed current loss recognition, characterizing the fee conveyance as a sale and the leaseback as a condition precedent; the Commissioner appealed.

## Issues

1. Whether the sale-leaseback was a nonrecognition exchange of like-kind property interests under I.R.C. § 1031, requiring denial of current loss recognition.
2. Whether the transaction should be treated as a taxable sale governed by the general recognition rule (I.R.C. § 1002), allowing current recognition of Leslie’s loss.
3. Whether any portion of the claimed loss was instead a capital expenditure to obtain the lease, amortizable over the lease term.

## Decision

- The Third Circuit affirmed the Tax Court.
- The court held the fee conveyance to Prudential was a sale for money consideration, not a reciprocal transfer of property interests required for a § 1031 exchange.
- The leaseback was treated as a separate, market-rate tenancy arrangement and not “property” received by Leslie in exchange for the fee.
- Leslie’s 1968 loss on the sale was currently recognizable and not required to be capitalized as a lease acquisition cost.

## Legal Principles

- A § 1031 like-kind exchange requires a reciprocal transfer of property; a transfer for monetary consideration only is a sale subject to recognition under the general rule.
- In characterizing sale-leaseback transactions, courts examine substance and economic reality, including whether the lease terms confer an independently valuable property interest on the taxpayer.
- Market-rate rent and contractual provisions indicating no compensable leasehold value support treating a leaseback as a separate lease rather than consideration received in a like-kind exchange.
- Limited future repurchase options and lack of retained control are factors supporting treatment of the conveyance as a completed sale.

## Conclusion

The court treated the transaction as a taxable sale followed by a separate leaseback, not a § 1031 like-kind exchange, and permitted Leslie to recognize its loss in the year of sale rather than capitalizing it as a lease acquisition cost.


Leslie Co. v. Commissioner, 539 F.2d 943 (3d Cir. 1976)