dissenting: If I understand the majority opinion correctly, its rationale is (1) the sale and leaseback constituted “integral parts of a single transaction” but this factor is not dispositive of the issue of whether there was an exchange under section 1031, and (2) since the sales price and the lease rental were “for fair value,” the lease lacked “capital value” and “the transaction must be classified as a bona fide sale and not as an exchange.” I think this rationale is erroneous.
I start from the premise that the record supports a finding that the price Prudential paid for the property was equal to its fair market value and that the lease rental was “fair” (as to which the record, to put it mildly, is sparse). But the fact of the matter is that although the lease in the instant case may not have had a “capital value” in the normal sense of that term, it did have a value beyond the fair rental value to the petitioner herein.
Whatever the respective values of the lease and the fee, it is clear from the record herein that petitioner entered into the transaction with its eyes wide open. It knew at the outset that Prudential would acquire the full benefit (in the form of title to the fee) of all of its expenditures with regard to the property. It committed itself to expend whatever sums it took to construct the building with those improvements required by its own special needs and to pay the legal fees and other costs1 required to consummate the transaction with Prudential. The record herein contains insufficient evidence to support a finding that the petitioner did not contemplate or should not have reasonably contemplated the possibility of a cost overrun; indeed, the record tends to indicate that the opposite was the case.2 The reason for petitioner’s willingness to run the risk of this financial exposure is obvious; in order to operate its business, it needed and was entitled to obtain the lease from Prudential. Thus, the lease had a value to this petitioner beyond the rental value, namely, any excess cost that it might incur. In this respect, the situations of the taxpayers in both Jordan Marsh Co. v. Commissioner, 269 F. 2d 453 (2d Cir. 1959), revg. T. C. Memo. 1957-237, and Century Electric Co. v. Commissioner, 192 F. 2d 155 (8th Cir. 1951), affg. 15 T.C. 581 (1950), are clearly distinguishable. In both those cases, the costs in excess of the fair market value of the fee and/or the fair value of the lease were incurred long before the transaction under scrutiny (in one case, 12 years, and in the other, 13 years). It could not possibly be said that those costs were undertaken in order to consummate the transaction. Here, by way of contrast, petitioner incurred the excess costs for the express purpose of engaging in the transaction with Prudential. Under these circumstances, petitioner, unlike the taxpayer in Jordan Marsh, was not “closing] out a losing venture” (see 269 F. 2d at 456), i.e., a venture that did not start out on a predetermined course.
Under my reasoning, it is unnecessary for me to decide the extent to which the decision or rationale of the Second Circuit Court of Appeals in Jordan Marsh is in conflict with Century Electric. See City Investing Co., 38 T.C. 1, 7 (1962). I have no hesitancy, however, in holding that, even though there was a sale and not an exchange under section 1031,3 the excess expended by petitioner over the cash received from Prudential, as far as the petitioner is concerned, should be considered as akin to a bonus paid for the lease and amortized over its term. University Properties, Inc., 45 T. C. 416 (1966), affd. 378 F. 2d 83 (9th Cir. 1967), and cases cited therein.4
Raum, Drennen, Quealy, and Hall, JJ., agree with this dissent.The situation with respect to the cost of “miscellaneous personal property” is not clear, but it would appear that this included such property erected on or attached to the realty rather than movable property, since.'the former category was included in the lease while the latter was not.
If the absence of such a contemplated cost overrun were shown to exist, it could be argued that the excess represented a loss rather than a payment for the lease, but I express no opinion as to what my conclusion would be under such circumstances.
In view of the prior commitment by petitioner to sell the property to Prudential, it would seem that, in any event, the requirement of sec. 1031 that the property exchanged be “held for productive use in trade or business * * * (not including * * * property held primarily for sale * * *)” was not satisfied, at least as far as the building was concerned. Cf. Brooks Griffin, 49 T.C. 253 (1967).
Neither party addressed itself to the issue whether the transaction herein was a mere financing arrangement. Cf. Helvering v. F. & R. Lazarus & Co., 308 U.S. 252 (1939). Similarly, neither party advanced the contention that petitioner simply acted as Prudential’s agent in constructing the building and was simply a conduit for the formal transfer of the property because of its ownership of the land, although it appears that a plausible argument in this vein might have been made.