Jordan Marsh Company v. Commissioner of Internal Revenue
1959 U.S. App. LEXIS 3414, 4 A.F.T.R.2d (RIA) 5341, 269 F.2d 453 (1959)
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Rule of Law:
A transaction involving the sale of property for its full fair market value in cash with a simultaneous leaseback of the same property for fair market value rent constitutes a 'sale' under Internal Revenue Code § 112(a) and (e), allowing for immediate recognition of loss, rather than a 'like-kind exchange' under § 112(b)(1) which would defer loss recognition.
Facts:
- Jordan Marsh Company operated a department store in Boston.
- In 1944, Jordan Marsh conveyed the fee (ownership) of two properties in Boston where its department store operated.
- In return for the conveyances, Jordan Marsh received $2,300,000 in cash.
- The $2,300,000 concededly represented the full fair market value of the properties.
- The conveyances were unconditional, without any provision for Jordan Marsh to repurchase the properties.
- At the same time, Jordan Marsh leased back the same properties from the vendees for terms of 30 years and 3 days.
- The leases included options for Jordan Marsh to renew for another 30 years if new buildings were erected.
- The rentals to be paid under the leases were concededly full and normal, so the leasehold interests had no capital value.
Procedural Posture:
- Jordan Marsh Company filed its 1944 tax return, claiming a deduction for the difference between the property's adjusted basis and the cash received, treating the transaction as a sale under § 112(a) of the Internal Revenue Code of 1939.
- The Commissioner of Internal Revenue disallowed the deduction, classifying the transaction as an exchange of property for other property of like kind under § 112(b)(1) and § 112(e), citing Treasury Regulation 111, § 29.112(b)(1)-1.
- The Commissioner issued a deficiency assessment of $2,101,823.39 in income and excess profits tax against Jordan Marsh Company.
- The Tax Court upheld the Commissioner’s determination.
- Jordan Marsh Company filed a petition to review the Tax Court's order in the U.S. Court of Appeals for the First Circuit.
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Issue:
Does a transaction in which a taxpayer sells property for its full fair market value in cash and simultaneously leases back the same property for a term exceeding 30 years at full and normal rental constitute a 'sale' allowing for immediate recognition of loss under § 112(a) and (e) of the Internal Revenue Code of 1939, or a 'like-kind exchange' under § 112(b)(1) precluding loss recognition?
Opinions:
Majority - Hincks, Circuit Judge
No, the transaction was a sale, not an exchange of property for other property of like kind, because Jordan Marsh Company completely liquidated its capital investment in the real estate for cash. The court reasoned that Congress's primary purpose in enacting § 112(b) for non-taxable exchanges was to defer recognition of gain or loss when a taxpayer's investment remains 'tied up in the same kind of property.' This provision was not intended to apply where the taxpayer has 'closed out a losing venture' by liquidating their investment for its full fair market value in cash. In this case, Jordan Marsh received the full fair market value of the fee in cash, thereby completely liquidating its capital investment. This represents a substantial change in the 'quantum of ownership' and the taxpayer's economic situation, transforming real estate investment into cash and a rental liability. The court distinguished Century Electric Co. v. Commissioner of Internal Rev., noting that in Century Electric, there was no finding that the cash received fully equaled the value of the fee or that the lease-back rent was full and normal, implying the leasehold might have had a premium value. In contrast, the stipulated facts here explicitly established that Jordan Marsh received the full market value for the property and the leaseback was at full and normal rentals, ensuring the leasehold had no independent capital value. The court concluded that, in ordinary usage, an 'exchange' means giving one property for another, not receiving cash for the full value of property and then leasing a lesser interest back.
Analysis:
This case significantly clarifies the distinction between a 'sale' and a 'like-kind exchange' for federal income tax purposes, particularly in the context of sale-and-leaseback transactions. By emphasizing the complete liquidation of a taxpayer's capital investment for cash at fair market value, the decision narrows the applicability of the non-recognition rules under § 112(b)(1) (now § 1031) and Treasury Regulation 111, § 29.112(b)(1)-1 (which treated long-term leaseholds as like-kind to fee interests). This ruling provides taxpayers with a clearer standard for recognizing immediate losses (or gains) in such arrangements, impacting real estate tax planning strategies and limiting the Commissioner's ability to recharacterize transactions that genuinely 'cash out' an investment.
