Retention of Control Over Stock Constitutes “Ownership” Under Section 1239 of the Internal Revenue Code-Harry Trotz

Petitioner set up a corporation, retaining seventy-nine per cent of the stock and -distributing the remainder to a third party. The third party borrowed from petitioner, pledging his stock as security and executing an option agreement under which the petitioner could recover the stock at any time. Subsequently, the newly organized corporation purchased all the depreciable assets of petitioner’s proprietorship at a price in excess of their adjusted basis; petitioner reported the difference as a capital gain. The Commissioner declared a deficiency, relying on section 1239 of the Internal Revenue Code, which treats as ordinary income the gain recognized from a sale by an individual to a corporation of which he is at least an eighty per cent owner. The Tax Court sustained the Commissioner’s position, holding that although the petitioner had legal title to only seventy-nine per cent of the stock, his degree of control over the remaining twenty-one per cent amounted to “ownership” under section 1239.