Income Tax–Capital Gains Tax–Meaning of “More Than 80 Percent in Value of the Outstanding Stock” Under Section 1239

The sale of property by a taxpayer to a corporation which he controls has been a frequently attempted method of tax reduction for more than thirty years. Such a transaction has the advantage of maintaining ownership of the property in virtually the same hands, while at the same time resulting in a substantial mitigation of tax liability. For instance, in the post-World War II period, when property values were generally increasing, a taxpayer could sell to his controlled corporation at a gain depreciable property with a basis lowered by adjustments for prior depreciation allowances. The gain was immediately taxable at the capital gains rate, but the sale price established a new basis for depreciation for the controlled corporation, which, in subsequent years, permitted substantial annual depreciation deductions from income taxable at ordinary income rates. The resulting savings in income taxes often outweighed the initial payment of the capital gains tax on the sale. To preclude this method of tax avoidance, section 1239 of the Internal Revenue Code of 1954-first enacted as section 328 of the Revenue Act of 1951-provides for taxation of the initial gain at ordinary income rates, rather than the lower capital gains rates, when the transfer or owns “more than 80 percent in value” of the transferee corporation’s outstanding stock. Thus, the problem becomes one of determining whether a taxpayer owns “more than 80 percent in value of the outstanding stock” of the transferee, that measure being the congressional definition of a controlled corporation for purposes of section 1239.