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James v. Commissioner Talbot v. Commissioner

James v. Commissioner Talbot v. Commissioner. Ellie Chernecky TX 8020. Citation and Judge. Tax Court of the United States, 1969 53 T.C. 63 Judge Simpson. Facts. James and Talbot agreed to build an apartment complex which followed FHA guidelines

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James v. Commissioner Talbot v. Commissioner

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  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 Talbot’s 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 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.

  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.

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