James v. Commissioner Talbot v. Commissioner

1
James v. CommissionerTalbot v. Commissioner

• Ellie Chernecky
• TX 8020

2
Citation and Judge

• Tax Court of the United States, 1969
• 53 T.C. 63
• Judge Simpson

3
Facts

• James and Talbot agreed to build an apartment
  complex which followed FHA guidelines
• James and Talbot agreed to form Chicora
  Apartments, Inc. to hold title to this project
  and divide the shares of stock 50-50
• Talbot donated land with a value of 44,000 in
  exchange for 10 shares of stock James also
  received 10 shares of stock. James agreed to
  oversee the development of the project and secure
  the FHA loan through United Mortgagee.
• Neither James nor Talbot reported any activity of
  this transfer of property on their tax returns.

4
Issues

• Did James personal services result in the
  development of a property right which was
  transferred to Chicora, Inc. within the meaning
  of Section 351?
• Did the Talbots meet the requirements under
  Section 351 to escape treatment of a long-term
  capital gain on their tax return?

5
Argument

• James argued that his shares of stock were
  granted due to the transfer of the loan from FHA
  to Chicora, Inc. This was the property he had
  secured and transferred within the guidelines of
  Section 351.
• This argument is further supported by an
  ascertain of the transfer of patents and secret
  processes that can be deemed as transfer of
  property under Section 351.

6
Conclusion (James)

• The Court found that although James secured the
  FHA loan for Chicora, Inc., the commitment of the
  loan was from the lender (United Mortgagee) to a
  corporation. No commitment was made to any
  individual, and James never acquired anything for
  himself.
• James received his share of the stock in the
  corporation in return for the services performed
  by him and that he did not transfer any property,
  within the meaning of Section 351, to the
  corporation. Therefore, his 22,000 is taxable.

7
Conclusion (Talbot)

• Because the Court held that James did not
  transfer property to the corporation, this also
  affected Talbot. According to Section 351 (a),
  atleast 80 of Chicoras stock must be owned by
  those who transferred property. Since James no
  longer transferred property, Talbot owned only
  50 of Chicora and did not pass the 80-percent
  test. Therefore, Talbot is responsible for a
  long-term capital gain of 14,675.

8
Citations

• Hempt Brothers, Inc. v. U.S., 74-1 USTC 9188, 33
  AFTR2d 74-570, 490 F.2d 1172 (CA-3, 1974), and
  Reg. 1.453-9(c)(2).
• Rev. Rul. 64-56, 1964-1 C.B. 133 Rev. Rul.
  71-564, 1971-2 C.B. 179.
• 61 and 83.