## Facts

- Curtis L. Parker operated an oil and gasoline business and incorporated it in Louisiana in 1959.
- The corporation had 1,000 authorized shares; Parker subscribed to 800 shares and employee/friend B.K. Eaves subscribed to 200 shares, partly financed by credit.
- The corporate charter and stock certificates imposed a corporate right of first refusal on any proposed share transfer.
- A separate stockholders’ agreement required Eaves (or his estate) to sell his shares to Parker if Eaves’s employment ended for any reason, including death.
- The agreement set a buyout price at “fair market” value but expressly excluded goodwill and other intangible assets; later values were to be set by the parties, with arbitration if needed.
- Shortly after incorporation, Parker sold depreciable business assets (vehicles, equipment, furniture/fixtures) to the corporation for about $95,738.70, payable over ten years with interest.
- The Parkers reported the gain from the sale of the depreciable assets as long-term capital gain.
- The Commissioner applied I.R.C. § 1239, asserting Parker owned more than 80% in value of the corporation’s outstanding stock, so the gain was ordinary income; deficiencies were assessed for 1959–1961.
- The Parkers paid and filed a refund suit.

## Issues

1. Whether, for purposes of I.R.C. § 1239, Parker “owned more than 80 percent in value of all outstanding stock” when 20% of the shares were held by an employee subject to substantial transfer and buy-sell restrictions.
2. Whether the gain from Parker’s sale of depreciable property to the corporation must be treated as ordinary income under § 1239 rather than capital gain.

## Decision

- The Fifth Circuit reversed the summary judgment entered for the taxpayers.
- The court held that § 1239 required looking to ownership “in value,” not merely the number of shares.
- Considering the restrictions and buy-sell provisions affecting Eaves’s shares, Parker in substance owned more than 80% of the corporation’s stock value.
- Because Parker exceeded the “more than 80 percent in value” threshold, § 1239 applied and the gain on the sale of depreciable assets was ordinary income.

## Legal Principles

- Under I.R.C. § 1239, gain from the sale of depreciable property to a corporation is ordinary income if the seller owns more than 80% in value of the corporation’s outstanding stock.
- The “in value” inquiry is economic and may require discounting minority shares burdened by significant transfer restrictions and compulsory buy-sell arrangements.
- Where contractual restrictions depress the economic rights of a nominal minority shareholder and concentrate economic benefits in the seller, the corporation may be treated as controlled for § 1239 despite a formal 80/20 split.
- Courts interpret § 1239 in light of its anti-avoidance purpose to prevent conversion of ordinary income into capital gain through sales to controlled entities.

## Conclusion

The court held that Parker’s restricted-share arrangement left him with more than 80% of the corporation’s stock value, so § 1239 recharacterized his gain on the sale of depreciable assets to the corporation as ordinary income rather than capital gain.


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