James v. Commissioner
Talbot v. Commissioner
Ellie Chernecky
TX 8020
Citation and Judge
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Tax Court of the United States, 1969
53 T.C. 63
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Judge Simpson
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Facts
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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.
Issues
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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 Talbot’s meet the requirements
under Section 351 to escape treatment
of a long-term capital gain on their tax
return?
Argument
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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.
Conclusion (James)
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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.
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 Chicora’s 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.
Citations
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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.