## Facts

- William A. James was a South Carolina builder and real estate developer.
- In 1963, James and C. N. Talbot (and their spouses) agreed to work together on constructing a rental apartment project expected to meet Federal Housing Administration (FHA) requirements.
- The agreement contemplated that a corporation would be formed to hold title to the project, and that James and the Talbots would each own 50% of the voting stock after formation.
- The Talbots agreed to contribute the land for the project; James agreed to plan, design, construct the building, and obtain financing.
- James obtained FHA and lender mortgage commitments totaling $850,700, and the parties understood that the FHA required the mortgage borrower to be a corporation.
- On November 5, 1963, the parties formed Chicora Apartments, Inc., with 20 common shares.
- The Talbots transferred the land to Chicora and received 10 common shares.
- James received the other 10 common shares, described as being in consideration for the mortgage commitments he had obtained.
- James did not report the receipt of the Chicora stock as income, taking the position that his exchange of mortgage commitments for stock qualified for nonrecognition under I.R.C. § 351.
- The Commissioner determined that the fair market value of James’s stock (about $22,000) was taxable income because it was received for services, and determined deficiencies (and an addition to tax for the Jameses). The Commissioner also treated the Talbots’ land transfer as taxable because § 351’s control requirement was not met if James was not a property transferor.

## Issues

1. Did James receive Chicora stock in exchange for “property” transferred to the corporation within the meaning of I.R.C. § 351 (i.e., transferable mortgage commitments), or did he receive the stock as compensation for services?
2. If James did not transfer “property” under § 351, did the Talbots’ transfer of land qualify for § 351 nonrecognition, given the requirement that property transferors control at least 80% of the corporation immediately after the exchange?
3. If § 351 did not apply, how should the stock received by James and the land transfer by the Talbots be taxed (ordinary income vs. capital gain recognition)?

## Decision

- The Tax Court held that James did not transfer “property” to Chicora within the meaning of I.R.C. § 351.
- The court found that the mortgage commitments were not an asset James personally owned and could transfer; the financing was structured and intended to be made to the corporation, and James never acquired an enforceable, separate property right in the commitments.
- Because James provided services (including obtaining financing and performing development-related work) rather than transferring property, the stock he received was compensation; the value of his Chicora shares (about $22,000) was taxable to him as ordinary income.
- Since James was not a property transferor, the only property transferors were the Talbots, who held 50% of Chicora immediately after the exchange; the 80% control requirement of § 351(a) was therefore not satisfied.
- As a result, the Talbots’ transfer of land did not qualify for § 351 nonrecognition and was treated as a taxable disposition, producing recognized long-term capital gain.
- The court sustained the Commissioner’s deficiency determinations (subject to computation).

## Legal Principles

- For § 351 nonrecognition, stock must be received in exchange for “property”; stock issued for services does not qualify as received for property under § 351.
- To constitute “property” for § 351, the transferor must own an identifiable, transferable interest; effort spent obtaining financing, without ownership of a separate enforceable right, is not a property transfer.
- Stock received as compensation for services is includable in gross income at its fair market value (generally as ordinary income).
- Section 351(a) requires that persons transferring property control the corporation immediately after the exchange (at least 80% of voting power and 80% of each class); if a participant is treated as a service provider rather than a property transferor, that participant’s stock does not count toward the 80% control group.
- When § 351 does not apply, a land contribution in exchange for stock can be treated as a taxable exchange, with gain recognized to the extent required under general realization rules.

## Conclusion

James’s Chicora stock was taxable compensation because he received it for services in arranging financing and developing the project, not for transferring “property” under § 351; because that classification prevented the property transferors from meeting § 351’s 80% control test, the Talbots’ land-for-stock transfer also failed § 351 and resulted in recognized long-term capital gain.


James v. Commissioner, 53 T.C. 63 (1969)