Appeal from the Decision of the United States Tax Court (Tax Court Docket No. 5964-72).
Aldisert, Gibbons, and Garth, Circuit Judges.
This appeal involves the tax consequences of a sale and leaseback arrangement. The question presented is whether the sale and leaseback arrangement constitutes an exchange of like-kind properties, on which no loss is recognized, or whether that transaction is governed by the general recognition provision of Int. Rev. Code § 1002.*fn1 The Tax Court, on taxpayer's petition for a redetermination of deficiencies assessed against it by the Commissioner, held that the fee conveyance aspect of the transaction was a sale entitled to recognition, and that the leaseback was merely a condition precedent to that sale. The Tax Court thereby allowed the loss claimed by the taxpayer. For the reasons given below, we affirm.
Leslie Company, the taxpayer, is a New Jersey corporation engaged in the manufacture and distribution of pressure and temperature regulators and instantaneous water heaters. Leslie, finding its Lyndhurst, New Jersey plant inadequate for its needs, decided to move to a new facility. To this end, in March 1967 Leslie purchased land in Parsippany, on which to construct a new manufacturing plant.
Leslie, however, was unable to acquire the necessary financing for the construction of its proposed $2,400,000 plant. Accordingly, on October 30, 1967, it entered into an agreement with the Prudential Life Insurance Company of America, whereby Leslie would erect a plant to specifications approved by Prudential and Prudential would then purchase the Parsippany property and building from Leslie. At the time of purchase Prudential would lease back the facility to Leslie. The property and improvements were to be conveyed to Prudential for $2,400,000 or the actual cost to Leslie, whichever amount was less.
The lease term was established at 30 years,*fn2 at an annual net rental of $190,560, which was 7.94% of the purchase price. The lease agreement gave Leslie two 10-year options to renew. The annual net rental during each option period was $72,000, or 3% of the purchase price. The lease also provided that Leslie could offer to repurchase the property*fn3 at five year intervals, beginning with the 15th year of the lease, at specified prices as follows:
at the end of the (20th year 1,592,000
Under the lease Prudential was entitled to all condemnation proceeds, net of any damages suffered by Leslie with respect to its trade fixtures and certain structural improvements, ...