## Facts

- Leslie Company, a New Jersey manufacturer, needed a larger facility and planned to relocate from Lyndhurst, New Jersey.
- In March 1967, Leslie acquired land in Parsippany, New Jersey, to build a new plant, projected to cost about $2.4 million, but could not obtain conventional long-term financing.
- On October 30, 1967, Leslie and Prudential entered a sale-leaseback arrangement: Leslie would construct the plant to Prudential-approved specifications; Prudential would buy the land and building for $2.4 million or Leslie’s actual cost, whichever was less; Prudential would lease the property back to Leslie.
- Leslie spent $3,187,414 on the land and construction; in December 1968, Leslie conveyed the property to Prudential for $2.4 million.
- At transfer, the property’s fair market value was $2.4 million and its fair market annual rental value was $190,560 (7.94% of $2.4 million).
- The leaseback provided a 30-year net lease at $190,560 per year, two 10-year renewal options at $72,000 per year (3% of $2.4 million), and repurchase options at specified prices at five-year intervals beginning in year 15; Leslie bore typical net-lease obligations (taxes, insurance, maintenance).
- Leslie reported a $787,414 loss on the 1968 disposition and claimed related NOL and investment credit carrybacks.
- The Commissioner disallowed the loss and carrybacks, treating the integrated transaction as a like-kind exchange under I.R.C. § 1031 (nonrecognition).

## Issues

1. Whether the sale-leaseback constituted an “exchange” of like-kind property under I.R.C. § 1031, requiring nonrecognition of the loss, or instead a cash sale followed by a separate lease.
2. If the transaction was a sale, whether the excess of Leslie’s basis over the sale price could be amortized over the lease term as a cost of acquiring the leasehold.

## Decision

- The Tax Court held the fee conveyance to Prudential was a cash sale; the leaseback was a separate legal interest and a condition to the sale, not property received in an exchange under § 1031.
- Because § 1031 did not apply, Leslie’s realized loss on the sale was recognizable.
- The Tax Court denied amortization of the excess basis over the sale price as a lease acquisition cost.
- The Third Circuit affirmed.

## Legal Principles

- I.R.C. § 1031 applies only to reciprocal property-for-property exchanges; a transfer for cash is a sale, even if paired with contemporaneous contractual arrangements.
- A leasehold received as part of a sale-leaseback does not, by itself, convert a cash disposition into an exchange when the taxpayer receives money for the fee interest.
- Fair market sale price and fair market rent support characterization of a sale-leaseback as a bona fide sale and lease, rather than a disguised like-kind exchange.
- A taxpayer cannot recharacterize an economic loss on the sale of property (unrecovered basis) as an amortizable cost of obtaining a leasehold interest.

## Conclusion

The Tax Court treated Leslie’s transaction as a cash sale followed by a separate leaseback, so § 1031 nonrecognition did not apply and the loss was recognized, but the portion of basis exceeding the sale price could not be amortized as a lease acquisition expenditure.


Leslie Co. v. Commissioner, 64 T.C. 247 (1975)