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
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