Leslie Co. v. Commissioner

Leslie Company (plaintiff), unable to finance construction of a new plant, arranged for Prudential Life Insurance to buy the completed plant for the lesser of $2.4 million or actual cost and lease it back to Leslie for 30 years. Leslie spent $3,187,414 building the plant but conveyed it to Prudential for $2.4 million, consistent with fair market value, and paid $190,560 in annual rent, consistent with fair rental value; the lease gave Prudential all condemnation and casualty proceeds and barred Leslie from deducting any leasehold value. Leslie reported a $787,414 loss on its 1968 tax return. The commissioner (defendant) disallowed the loss, treating the transaction as a nontaxable like-kind exchange under section 1031 requiring the loss to be amortized over the lease term instead. The Tax Court disagreed, finding the transaction a sale because Leslie's leasehold had no capital value and thus wasn't part of the consideration received.