United States v. Parker
376 F.2d 402 (5th Cir. 1967)

  • Parker and his wife owned a gas station. They formed a corporation with an employee named Eaves. The Parkers got 80% of the stock and Eaves got 20% of the stock.
    • Technically, Eaves didn't get the 20% right away, he only paid for about 6.5%. The rest of the shares were held by the corporation until such time that Eaves could afford to buy them.
  • In addition, the Parkers sold the corporation a bunch of depreciable property (furniture, equipment, etc.) for about $96k.
  • When he filed his taxes, Parker reported the $96k as a sale of a capital gain. The IRS disagreed.
    • Parker argued that it was a capital gain under 26 U.S.C. 1231.
    • The IRS argued that under 26 U.S.C. 1239 the transaction should be considered ordinary income because the Parkers owned 80% of the corporation at the time.
      • 1239 prevents sales or exchanges of depreciable property to be considered capital gains when they are made to a corporation if the taxpayer (or spouse) owns "more than 80% in value" of the corporation.
    • Parker argued that he didn't own more than 80% of the corporation, he only owned exactly 80%, therefore 1239 doesn't apply.
  • The Trial Court found for Parker. The IRS appealed.
  • The Appellate Court reversed and found the sale to be ordinary income.
    • The Appellate Court looked to the specific wording of 1239 and found that the term "in value" must mean something different than "shares" or "voting power."
    • The Court found that (for several reasons) the Parkers' shares were worth more than Eaves' shares.
      • Eaves was restricted on who he could transfer his stock to, and the Parkers controlled a voting majority so Eaves had little actual power in the corporation's business decisions.
    • The Court found that since Parker owned 80% of the stock, and his shares were worth more than Eaves, that Parker owned more than 80% of the value of the corporation. Therefore, the 1239 restriction applies and the sale cannot be treated as a capital gain.
  • The Court chose not to speculate on exactly how much value Parker had, they only knew that it was something greater than 80%.
    • Had Parker only owned 79% of the stock, would he have still had more than 80% of the value? Who knows?