§1239 — Gain from sale of depreciable property between certain related taxpayers
35 citing cases
Statute Text — 26 U.S.C. §1239
In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167.
For purposes of subsection (a), the term “related persons” means—
a person and all entities which are controlled entities with respect to such person,
a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary’s interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and
except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
For purposes of this section, the term “controlled entity” means, with respect to any person—
a corporation more than 50 percent of the value of the outstanding stock of which is owned (directly or indirectly) by or for such person,
a partnership more than 50 percent of the capital interest or profits interest in which is owned (directly or indirectly) by or for such person, and
any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b).
For purposes of this section, ownership shall be determined in accordance with rules similar to the rules under section 267(c) (other than paragraph (3) thereof).
For purposes of subsection (a), the term “related person” also includes—
an employer and any person related to the employer (within the meaning of subsection (b)), and
a welfare benefit fund (within the meaning of section 419(e)) which is controlled directly or indirectly by persons referred to in paragraph (1).
For purposes of this section, a patent application shall be treated as property which, in the hands of the transferee, is of a character which is subject to the allowance for depreciation provided in section 167.
Treasury Regulations
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Treas. Reg. §1.1239-1Gain from sale or exchange of depreciable property between certain related taxpayers after October 4, 1976
(a) In general. In the case of a sale or exchange of property, directly or indirectly, between related persons after October 4, 1976 (other than a sale or exchange made under a binding contract entered into on or before that date), any gain recognized by the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, subject to the allowance for depreciation provided in section 167. This rule also applies to property which would be subject to the allowance for depreciation provided in section 167 except that the purchaser has elected a different form of deduction, such as those allowed under sections 169, 188, and 191.
(b) Related persons. For purposes of paragraph (a) of this section, the term related persons means:
(1) A husband and wife,
(2) An individual and a corporation 80 percent or more in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual, or
(3) Two or more corporations 80 percent or more in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual.
(c) Rules of construction—(1) Husband and wife. For purposes of paragraph (b)(1) of this section, if on the date of the sale or exchange a taxpayer is legally separated from his spouse under an interlocutory decree of divorce, the taxpayer and his spouse shall not be treated as husband and wife, provided the sale or exchange is made pursuant to the decree and the decree subsequently becomes final. Thus, if pursuant to an interlocutory decree of divorce, an individual transfers depreciable property to his spouse and, because of this section, the gain recognized on the transfer of the property is treated as ordinary income, the individual may, if the interlocutory decree becomes final after his tax return has been filed, file a claim for a refund.
(2) Sales between commonly controlled corporations. In general, in the case of a sale or exchange of depreciable property between related corporations (within the meaning of paragraph (b)(3) of this section), gain which is treated as ordinary income by reason of this section shall be taxable to the transferor corporation rather than to a controlling shareholder. However, such gain shall be treated as ordinary income taxable to a controlling shareholder rather than the transferor corporation if the transferor corporation is used by a controlling shareholder as a mere conduit to make a sale to another controlled corporation, or the entity of the corporate transferor is otherwise properly disregarded for tax purposes. Sales between two or more corporations that are related within the meaning of paragraph (b)(3) of this section may also be subject to the rules of section 482 (relating to allocation of income between or among organizations, trades, or businesses which are commonly owned or controlled), and to rules requiring constructive dividend treatment to the controlling shareholder in appropriate circumstances.
(3) Relationship determination for transfers made after January 6, 1983—taxpayer and an 80-percent owned entity. For purposes of paragraph (b)(2) of this section with respect to transfers made after January 6, 1983—
(i) If the transferor is an entity, the transferee and such entity are related if the entity is an 80-percent owned entity with respect to such transferee either immediately before or immediately after the sale or exchange of depreciable property, and
(ii) If the transferor is not an entity, the transferee and such transferor are related if the transferee is an 80-percent owned entity with respect to such transferor immediately after the sale or exchange of depreciable property.
(4) Relationship determination for transfers made after January 6, 1983—two 80-percent owned entities. For purposes of paragraph (b)(3) of this section, with respect to transfers made after January 6, 1983, two entities are related if the same shareholder both owns 80 percent or more in value of the stock of the transferor before the sale or exchange of depreciable property and owns 80 percent or more in value of the stock of the transferee immediately after the sale or exchange of depreciable property.
(5) Ownership of stock. For purposes of determining the ownership of stock under this section, the constructive ownership rules of section 318 shall be applied, except that section 318(a)(2)(C) (relating to attribution of stock ownership from a corporation) and section 318(a)(3)(C) (relating to attribution of stock ownership to a corporation) shall be applied without regard to the 50-percent limitation contained therein. The application of the constructive ownership rules of section 318 to section 1239 is illustrated by the following examples:
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Treas. Reg. §1.1239-1(a)In general.
In general. In the case of a sale or exchange of property, directly or indirectly, between related persons after October 4, 1976 (other than a sale or exchange made under a binding contract entered into on or before that date), any gain recognized by the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, subject to the allowance for depreciation provided in section 167. This rule also applies to property which would be subject to the allowance for depreciation provided in section 167 except that the purchaser has elected a different form of deduction, such as those allowed under sections 169, 188, and 191.
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Treas. Reg. §1.1239-1(b)Related persons.
Related persons. For purposes of paragraph (a) of this section, the term related persons means:
(1) A husband and wife,
(2) An individual and a corporation 80 percent or more in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual, or
(3) Two or more corporations 80 percent or more in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual.
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Treas. Reg. §1.1239-1(c)Rules of construction—(1) Husband and wife.
Rules of construction—(1) Husband and wife. For purposes of paragraph (b)(1) of this section, if on the date of the sale or exchange a taxpayer is legally separated from his spouse under an interlocutory decree of divorce, the taxpayer and his spouse shall not be treated as husband and wife, provided the sale or exchange is made pursuant to the decree and the decree subsequently becomes final. Thus, if pursuant to an interlocutory decree of divorce, an individual transfers depreciable property to his spouse and, because of this section, the gain recognized on the transfer of the property is treated as ordinary income, the individual may, if the interlocutory decree becomes final after his tax return has been filed, file a claim for a refund.
(2) Sales between commonly controlled corporations. In general, in the case of a sale or exchange of depreciable property between related corporations (within the meaning of paragraph (b)(3) of this section), gain which is treated as ordinary income by reason of this section shall be taxable to the transferor corporation rather than to a controlling shareholder. However, such gain shall be treated as ordinary income taxable to a controlling shareholder rather than the transferor corporation if the transferor corporation is used by a controlling shareholder as a mere conduit to make a sale to another controlled corporation, or the entity of the corporate transferor is otherwise properly disregarded for tax purposes. Sales between two or more corporations that are related within the meaning of paragraph (b)(3) of this section may also be subject to the rules of section 482 (relating to allocation of income between or among organizations, trades, or businesses which are commonly owned or controlled), and to rules requiring constructive dividend treatment to the controlling shareholder in appropriate circumstances.
(3) Relationship determination for transfers made after January 6, 1983—taxpayer and an 80-percent owned entity. For purposes of paragraph (b)(2) of this section with respect to transfers made after January 6, 1983—
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Treas. Reg. §1.1239-1(i)§1.1239-1(i)
If the transferor is an entity, the transferee and such entity are related if the entity is an 80-percent owned entity with respect to such transferee either immediately before or immediately after the sale or exchange of depreciable property, and
(ii) If the transferor is not an entity, the transferee and such transferor are related if the transferee is an 80-percent owned entity with respect to such transferor immediately after the sale or exchange of depreciable property.
(4) Relationship determination for transfers made after January 6, 1983—two 80-percent owned entities. For purposes of paragraph (b)(3) of this section, with respect to transfers made after January 6, 1983, two entities are related if the same shareholder both owns 80 percent or more in value of the stock of the transferor before the sale or exchange of depreciable property and owns 80 percent or more in value of the stock of the transferee immediately after the sale or exchange of depreciable property.
(5) Ownership of stock. For purposes of determining the ownership of stock under this section, the constructive ownership rules of section 318 shall be applied, except that section 318(a)(2)(C) (relating to attribution of stock ownership from a corporation) and section 318(a)(3)(C) (relating to attribution of stock ownership to a corporation) shall be applied without regard to the 50-percent limitation contained therein. The application of the constructive ownership rules of section 318 to section 1239 is illustrated by the following examples:
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Treas. Reg. §1.1239-2Gain from sale or exchange of depreciable property between certain related taxpayers on or before October 4, 1976
Section 1239 provides in general that any gain from the sale or exchange of depreciable property between a husband and wife or between an individual and a controlled corporation on or before October 4, 1976 (and in the case of a sale or exchange occurring after that date if made under a binding contract entered into on or before that date), shall be treated as ordinary income. Thus, any gain recognized to the transferor from a sale or exchange after May 3, 1951, and on or before October 4, 1976 (or thereafter if pursuant to a binding contract entered into on or before that date), directly or indirectly, between a husband and wife or between an individual and a controlled corporation, of property which, in the hands of the transferee, is property of a character subject to an allowance for depreciation provided in section 167 (including such property on which a deduction for amortization is allowable under sections 168 and 169) shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. For the purpose of section 1239, a corporation is controlled when more than 80 percent in value of all outstanding stock of the corporation is beneficially owned by the taxpayer, his spouse, and his minor children and minor grandchildren. For the purpose of this section, the terms children and grandchildren include legally adopted children and their children. The provisions of section 1239(a)(2) are applicable whether property is transferred from a corporation to a shareholder or from a shareholder to a corporation.
35 Citing Cases
1239, which eliminates capital gain treatment under other provisions of the Code, see, e.g., secs. 1221, 1231, in transactions involving related parties. Respondent instead argues that the amounts Dr. Filler received are taxable as ordinary income because sec. 1235 does not apply and the incorporation agreement described Dr.
Section 1239, Generally Section 1239 requires ordinary income treatment ofthe gain recognized from the sale or exchange ofproperty, directly or indirectly, between related persons, ifthe property in the hands ofthe transferee is "ofa character which is subject to the allowance for depreciation provided in section 167." According to the House r
127, 132 (1964) (stating that: "Petitioner's rights with respect to the stock * * * were so complete that they were tantamount to ownership by petitioner for the purposes ofsection 1239."), rev'd, 361 F.2d 927, 929 (10th Cir.
127, 132 (1964) (“Petitioner’s rights with respect to the stock * * * were so complete that they were tantamount to ownership by petitioner for the purposes of section 1239.”), rev’d, 361 F.2d 927, 929 (10th Cir.
Other Provisions of .the Code Besides sections 174(c) and 41(b)(2)(C), several other Code sections use the phrase "of a character subject to the allowance for depreciation" or its slight variation .21 Although none of these sections defines the phrase, we find the language of some other Code sections, in particular section 1239, instructive as to the meaning of the phrase in sections 174 (c) and 41 (b) .(2) (C) .
Although none of these sections defines the phrase, we find the language of some other Code sections, in particular section 1239, instructive as to the meaning of the phrase in sections 174(c) and 41(b)(2)(C).