Leslie v. Commissioner

539 F.2d 943 (3rd Cir. 1976)

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Nature of the Case

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Facts

P was a manufacturing company engaged in the manufacture and distribution of pressure and temperature regulators and water heaters. P needed a new facility and purchased land in 1976 but did not have the money to construct a new plant at that location. P then entered into a deal with Prudential Life Insurance upon which P would build the plant and Prudential would then purchase the plant from P at $2,400,000 or the actual cost to P whichever was less and Prudential would then lease the facility back to P for 30 years with repurchase options every five years. The total cost of construction was $3,187,414, and P then conveyed the building to Prudential and executed the 30-year lease. P then deducted from its 1968 tax return the monies it lost on the transaction; $787,414. The IRS disallowed the deduction; this was a like in-kind exchange, and thus there was no loss or gain. The Tax Court found that the transaction was a sale because the leasehold had no separate capital value (the lease was at market rates, so there was no value or advantage with respect to the lease) which could properly be viewed as part of the consideration paid; thus, P got $2,400,000 in monies for the sale of the building, and there was no like in-kind exchange.