26 U.S.C. § 1239 — Gain from sale of depreciable property be-

Page 2342 TITLE 26—INTERNAL REVENUE CODE § 1239 transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. § 1239. Gain from sale of depreciable property be- tween certain related taxpayers (a) Treatment of gain as ordinary income 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 deprecia- tion provided in section 167. (b) Related persons For purposes of subsection (a), the term ‘‘re- lated persons’’ means— (1) a person and all entities which are con- trolled entities with respect to such person, (2) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, un- less such beneficiary’s interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and (3) except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an ex- ecutor of an estate and a beneficiary of such estate. (c) Controlled entity defined (1) General rule For purposes of this section, the term ‘‘con- trolled entity’’ means, with respect to any per- son— (A) 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, (B) 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 (C) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b). (2) Constructive ownership For purposes of this section, ownership shall be determined in accordance with rules simi- lar to the rules under section 267(c) (other than paragraph (3) thereof). (d) Employer and related employee association For purposes of subsection (a), the term ‘‘re- lated person’’ also includes— (1) an employer and any person related to the employer (within the meaning of sub- section (b)), and (2) a welfare benefit fund (within the mean- ing of section 419(e)) which is controlled di- rectly or indirectly by persons referred to in paragraph (1). (e) Patent applications treated as depreciable property For purposes of this section, a patent applica- tion shall be treated as property which, in the hands of the transferee, is of a character which is subject to the allowance for depreciation pro- vided in section 167. (Aug. 16, 1954, ch. 736, 68A Stat. 332; Pub. L. 85–866, title I, § 56, Sept. 2, 1958, 72 Stat. 1645; Pub. L. 94–455, title XXI, § 2129(a), Oct. 4, 1976, 90 Stat. 1922; Pub. L. 95–600, title VII, § 701(v)(1), Nov. 6, 1978, 92 Stat. 2920; Pub. L. 96–471, § 5, Oct. 19, 1980, 94 Stat. 2255; Pub. L. 97–448, title III, § 301, Jan. 12, 1983, 96 Stat. 2397; Pub. L. 98–369, div. A, title I, § 175(a), (b), title IV, § 421(b)(6)(A), title V, § 557(a), July 18, 1984, 98 Stat. 708, 794, 898; Pub. L. 99–514, title VI, § 642(a)(1)(A)–(C), Oct. 22, 1986, 100 Stat. 2283, 2284; Pub. L. 105–34, title XIII, § 1308(b), Aug. 5, 1997, 111 Stat. 1041.) Editorial Notes AMENDMENTS 1997—Subsec. (b)(3). Pub. L. 105–34 added par. (3). 1986—Subsec. (b)(1). Pub. L. 99–514, § 642(a)(1)(A), sub- stituted ‘‘controlled entities’’ for ‘‘80-percent owned en- tities’’. Subsec. (c). Pub. L. 99–514, § 642(a)(1)(B), (C), in head- ing, substituted ‘‘Controlled entity’’ for ‘‘80-percent owned entity’’, in par. (1), in introductory provisions, substituted ‘‘controlled entity’’ for ‘‘80-percent owned entity’’, in subpar. (A), substituted ‘‘more than 50 per- cent of the value’’ for ‘‘80 percent or more in value’’, in subpar. (B), substituted ‘‘more than 50 percent’’ for ‘‘80 percent or more’’, and added subpar. (C), and amended par. (2) generally. Prior to amendment, par. (2) read as follows: ‘‘For purposes of subparagraphs (A) and (B) of paragraph (1), the principles of section 318 shall apply, except that— ‘‘(A) the members of an individual’s family shall consist only of such individual and such individual’s spouse, ‘‘(B) paragraph (2)(C) of section 318(a) shall be ap- plied without regard to the 50-percent limitation con- tained therein, and ‘‘(C) paragraph (3) of section 318(a) shall not apply.’’ 1984—Subsec. (b). Pub. L. 98–369, § 421(b)(6), redesig- nated pars. (2) and (3) as (1) and (2), respectively. Former par. (1), defining a husband and wife as ‘‘related persons’’, was struck out. Pub. L. 98–369, § 175(b), amended subsec. (b) generally, adding par. (3). Subsec. (d). Pub. L. 98–369, § 557(a), added subsec. (d). Subsec. (e). Pub. L. 98–369, § 175(a), added subsec. (e). 1983—Subsec. (b). Pub. L. 97–448, § 301(a), substituted provisions that ‘‘related persons’’ means (1) a husband and wife, and (2) a person and all entities which are 80- percent owned entities with respect to such person, for provisions which provided that ‘‘related persons’’ meant (1) the taxpayer and the taxpayer’s spouse, (2) the taxpayer and an 80-percent owned entity, or (3) two 80-percent owned entities. Subsec. (c)(1). Pub. L. 97–448, § 301(b), inserted ‘‘, with respect to any person’’ after ‘‘means’’ in introductory provisions and substituted ‘‘such person’’ for ‘‘the tax- payer’’ in subpars. (A) and (B). Subsec. (c)(2). Pub. L. 97–448, § 301(b), struck out ‘‘and’’ at end of subpar. (A), substituted ‘‘paragraph (2)(C)’’ for ‘‘paragraphs (2)(C) and (3)(C)’’ in subpar. (B), and added subpar. (C). 1980—Subsec. (b)(1). Pub. L. 96–471 substituted ‘‘the taxpayer and the taxpayer’s spouse’’ for ‘‘a husband and wife’’. Subsec. (b)(2). Pub. L. 96–471 substituted ‘‘the tax- payer and an 80-percent owned entity, or’’ for ‘‘an indi- vidual and a corporation 80 percent or more in value of the outstanding stock of which is owned, directly or in- directly, by or for such individual, or’’. Subsec. (b)(3). Pub. L. 96–471 substituted ‘‘two 80-per- cent owned entities’’ for ‘‘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’’. Page 2343 TITLE 26—INTERNAL REVENUE CODE § 1242 Subsec. (c). Pub. L. 96–471 substituted provisions de- fining an ‘‘80-percent owned entity’’ for provisions re- lating to constructive ownership of stock. 1978—Subsec. (a). Pub. L. 95–600 substituted ‘‘of a character which is subject to the allowance for depre- ciation provided in section 167’’ for ‘‘subject to the al- lowance for depreciation provided in section 167’’. 1976—Pub. L. 94–455 substituted ‘‘sale of depreciable property between certain related taxpayers’’ for ‘‘sale of certain property between spouses or between an indi- vidual and a controlled corporation’’ in section catch- line. Subsec. (a). Pub. L. 94–455 substituted provisions for transactions between related persons for such trans- actions (1) between a husband and wife; or (2) between an individual and a corporation more than 80 percent in value of the outstanding stock of which is owned by such individual, his spouse, and his minor children and minor grandchildren and ‘‘any gain recognized to the transferee 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’’ for ‘‘any gain recognized to the transferor from the sale or exchange of such property shall be considered as gain from the sale or exchange of property which is nei- ther a capital asset nor property described in section 1231’’. Subsec. (b). Pub. L. 94–455 substituted definition of ‘‘related persons’’ for prior provision making section applicable only to sales or exchanges of depreciable property. Subsec. (c). Pub. L. 94–455 substituted provision re- specting constructive ownership of stock for prior pro- vision making section inapplicable with respect to sales or exchanges made on or before May 3, 1951. 1958—Subsec. (c). Pub. L. 85–866 added subsec. (c). Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to taxable years beginning after Aug. 5, 1997, see section 1308(c) of Pub. L. 105–34, set out as a note under section 267 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title VI, § 642(c), Oct. 22, 1986, 100 Stat. 2284, as amended by Pub. L. 100–647, title I, § 1006(i)(3), Nov. 10, 1988, 102 Stat. 3411, provided that: ‘‘(1) IN GENERAL.—Except as provided in paragraph (2), the amendments made by this section [amending this section and sections 453 and 707 of this title] shall apply to sales after the date of the enactment of this Act [Oct. 22, 1986], in taxable years ending after such date. ‘‘(2) TRANSITIONAL RULE FOR BINDING CONTRACTS.—The amendments made by this section shall not apply to sales made after August 14, 1986, which are made pursu- ant to a binding contract in effect on August 14, 1986, and at all times thereafter.’’ EFFECTIVE DATE OF 1984 AMENDMENT Pub. L. 98–369, div. A, title I, § 175(c), July 18, 1984, 98 Stat. 708, provided that: ‘‘The amendments made by this section [amending this section] shall apply to sales or exchanges after March 1, 1984, in taxable years end- ing after such date.’’ Amendment by section 421(b)(6) of Pub. L. 98–369 ap- plicable to transfers after July 18, 1984, in taxable years ending after such date, subject to election to have amendment apply to transfers after 1983 or to transfers pursuant to existing decrees, see section 421(d) of Pub. L. 98–369, set out as an Effective Date note under sec- tion 1041 of this title. Pub. L. 98–369, div. A, title V, § 557(b), July 18, 1984, 98 Stat. 899, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to sales or exchanges after the date of the enactment of this Act [July 18, 1984] in taxable years ending after such date.’’ EFFECTIVE DATE OF 1983 AMENDMENT Amendment by Pub. L. 97–448 applicable to disposi- tions made after Oct. 19, 1980, in taxable years ending after such date, see section 311(a) of Pub. L. 97–448, set out as a note under section 453 of this title. EFFECTIVE DATE OF 1978 AMENDMENT Pub. L. 95–600, title VII, § 701(v)(2), Nov. 6, 1978, 92 Stat. 2920, as amended by Pub. L. 99–514, § 2, Oct. 22, 1986, 100 Stat. 2095, provided that: ‘‘The amendment made by paragraph (1) [amending this section] shall apply as if included in the amendment made to section 1239 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] by section 2129(a) of the Tax Reform Act of 1976 [section 2129(a) of Pub. L. 94–455].’’ EFFECTIVE DATE OF 1976 AMENDMENT Pub. L. 94–455, title XXI, § 2129(b), Oct. 4, 1976, 90 Stat. 1922, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to sales or ex- changes after the date of the enactment of this Act [Oct. 4, 1976]. For purposes of the preceding sentence, a sale or exchange is considered to have occurred on or before such date of enactment if such sale or exchange is made pursuant to a binding contract entered into on or before that date.’’ [§ 1240. Repealed. Pub. L. 94–455, title XIX, § 1901(a)(139), Oct. 4, 1976, 90 Stat. 1787] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 332, re- lated to taxability to employee of termination pay- ments. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF REPEAL Repeal applicable with respect to taxable years be- ginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. § 1241. Cancellation of lease or distributor’s agreement Amounts received by a lessee for the cancella- tion of a lease, or by a distributor of goods for the cancellation of a distributor’s agreement (if the distributor has a substantial capital invest- ment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement. (Aug. 16, 1954, ch. 736, 68A Stat. 333.) § 1242. Losses on small business investment com- pany stock If— (1) a loss is on stock in a small business in- vestment company operating under the Small Business Investment Act of 1958, and (2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset, then such loss shall be treated as an ordinary loss. For purposes of section 172 (relating to the net operating loss deduction) any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer. (Added Pub. L. 85–866, title I, § 57(a), Sept. 2, 1958, 72 Stat. 1645; amended Pub. L. 94–455, title XIX, § 1901(b)(3)(F), Oct. 4, 1976, 90 Stat. 1793.)